hankyoreh

A worker at Hana Bank’s anti-counterfeiting team inspects US$100 bills. (Yonhap) 

Amid imbalances in supply and demand in the foreign exchange market, the Bank of Korea has declared this to be an instance of “poverty amid plenty”:  While the forex swap market is brimming with dollars, the spot market doesn’t have enough. 

Yoon Kyoung-soo, the director general of international affairs for the central bank, posted a piece on the BOK blog on Monday titled, “Why is the exchange rate rising when there are plenty of dollars in the forex market?”

Yoon’s blog post offered his analysis and explanation for what he called a “seemingly paradoxical” situation Korea finds itself in. 

The foreign currency and capital markets involve financial institutions and banks lending money to actors; in exchange, they receive interest on the repayments. Normally, an actor puts up Korean won as collateral to borrow dollars; after a certain period has passed, the borrower is obliged to pay back the dollar principal in exchange for its pertinent value in won. That’s an FX swap, the primary type of transaction in the forex market. 
 
Currently, the interest rate for borrowing won in Korea is 2.4% (three-month basis). In the US, people are charged an interest rate of 3.6% when borrowing dollars.  

That difference in interest rate means that when putting up won as collateral and borrowing dollars, the lenders need to pay at least 1.2% in interest. Because the US dollar is the global reserve currency, people borrowing dollars pay an additional premium on that base interest rate, as the dollar is in higher demand compared to other currencies.  

The level of that dollar premium is determined by the laws of supply and demand. If there is a high supply of dollars, demand shrinks; if demand for dollar loans is high, then the value of each dollar increases.

On Dec. 15, the dollar premium decreased by as many as 0.004 percentage points (three-month basis). Between late June 2025 and the end of last year, it fell 0.022 percentage points. Recently, the dollar premium has been nearing 0%. Because there is little profit to be made by loaning dollars, it’s become easier for borrowers to obtain dollars. 

According to Yoon, the increase in the amount of dollars in the forex market is due to the maintenance of positive national balance sheet; the increase in the amount of dollars held by Korean firms, who rely primarily on exports, without exchanging them for won; and the increase in the amount of state bonds held by foreign investors (as a hedge against the forex market). 

Conversely, the rarity of dollars in the spot market — where actual dollars are directly traded for actual won — has led to the Korean won plummeting in value. 

It’s like a car market where the number of rentals is surging while nobody actually wants to sell or buy a car. The cost of renting goes down, while the actual price of cars doesn’t change, or even goes up.  

During a press conference last week, BOK Governor Rhee Chang-yong addressed supply and demand in the forex market.

“The problem lies in the fact that people are expecting the exchange rate to rise, therefore only lending dollars instead of selling on the spot market,” Rhee said. 

The BOK has concluded that the overall rise in the value of the dollar compared to the won in recent years is due to disparities in base interest rates and economic growth; it’s also due to the relatively lower profits generated by domestic financial assets. However, the BOK insists that won-dollar exchange rate movements seen in the fourth quarter of 2025 were primarily caused by volatility in supply and demand in the forex market. 

The problem is the growing negative public sentiment regarding the rising exchange rate. Yoon of the BOK wrote, “Right now, the dollar can be borrowed at historically low rates, so we’re far from a forex crisis.” 

“If the view that a rising exchange rate is indicative of weakening economic fundamentals spreads, it could lead to capital flight out of the country, which would exacerbate the exchange rate,” he said, calling this prospect a “self-fulfilling vicious cycle.” 

By Kim Hoe-seung, senior staff writer

Please direct questions or comments to [english@hani.co.kr]