Soaring Won-Dollar Exchange Rate Necessitates Stabilization Policies

The won-dollar exchange rate recently surpassed 1530 won, marking its highest point since the global financial crisis. This signifies a significant depreciation of the Korean won against other major currencies.

A rising exchange rate drives up the cost of imported raw materials, energy, and food items, leading to higher consumer prices for essentials such as gasoline, electricity and gas bills, dining out, and processed foods. Analyses by the Bank of Korea and other institutions suggest that for every 1% increase in the won-dollar exchange rate, consumer prices rise by approximately 0.05 to 0.1 percentage points. When these changes repeat and accumulate, the impact on perceived inflation becomes substantial.

The recent surge in the exchange rate is a result of complex factors including rising international oil prices due to tensions in the Middle East, capital flight to the dollar amid increasing global financial market uncertainty, and shifts in foreign capital flows. Within the context of the Korean economy's high dependence on imported energy and raw materials, and its sensitivity to capital movements, the shock has been concentrated on the won.

The current exchange rate movements reveal structural vulnerabilities in the Korean economy, where certain currencies experience greater volatility even under similar external conditions. An economic structure heavily reliant on exports while depending significantly on imported energy and raw materials, and being sensitive to capital flows, amplifies exchange rate volatility when external shocks occur.

It is crucial to understand not only the level of the exchange rate but also the process through which its fluctuations translate into burdens for households and businesses. When the same external shocks repeat and the burdens are transmitted in the same manner, negative outcomes are also repeated. The exchange rate is an indicator directly linked to living costs, and it represents the pathway through which these burdens are transmitted to people's lives via the Korean economic structure.

Now is the time to focus less on managing the exchange rate level itself and more on establishing institutional mechanisms and implementing policy responses to mitigate the shock transmitted through this pathway. Efforts to improve the economic structure itself and change the very way economic figures flow, so that the shock does not excessively pressure the lives of ordinary citizens, can no longer be postponed.