The Formula "Exchange Rate Falls When Interest Rate Gap Narrows" is Broken... 1,530 Won Market Weighed Down by Debt

Today (March 31), the won-dollar exchange rate surpassed 1,530 won during intraday trading. It is a figure seen for the first time since the global financial crisis. What is even more unusual is the Korea-U.S. interest rate gap. Currently, the interest rate gap between South Korea and the United States is 1.14%p, which is similar to the level three years ago in January 2023 (0.83%p) when the exchange rate was 1,243 won.

According to economics textbooks, when the interest rate gap between two countries narrows, dollar demand decreases and the exchange rate should fall as well. Even though both South Korea and the U.S. have been in a phase of cutting their benchmark interest rates, the exchange rate has instead soared into the 1,500 won range. This means that the current foreign exchange market cannot be explained by the interest rate gap alone. We examined the hidden side of the exchange rate surge by cross-analyzing 100,000 macroeconomic data points from the U.S. Federal Reserve (FRED), the Bank for International Settlements (BIS), and the Bank of Korea (ECOS).

Decline in the 'Real Value' of the Won Accounting for Inflation

The exchange rate is the relative value of the won against the dollar, but to see the fundamental strength of the national economy, one must look at the 'Real Effective Exchange Rate' compared to all major trading partners. According to the Bank for International Settlements (BIS), imports that could be bought for 1 million won three years ago can now only be bought for 880,000 won. Over the past three years, the real value of the won has dropped by 11.8%. On the other hand, the real purchasing power of the dollar has remained virtually unchanged during the same period. Even though the interest rate gap has narrowed, the fundamental strength of the won itself is draining, making it a structure where a drop in the exchange rate is hard to expect.

Massive Debt Absorbing the Effect of Interest Rate Cuts

Generally, when interest rates are lowered, money circulates in the market, increasing corporate investment and private consumption. However, the private debt borne by South Korean households and corporations amounts to twice the GDP (200.2%). Under these circumstances, the reduced interest costs from interest rate cuts do not lead to new consumption or stock investments, but are exhausted in maintaining existing loans. If new vitality does not circulate in the economy, the attractiveness of won-denominated assets will inevitably drop from the perspective of foreign investors. Conversely, the U.S. steadily reduced its debt ratio from 153.4% to 140.4% between the fourth quarter of 2022 and the third quarter of 2025. South Korea's debt ratio also decreased, but at a much slower pace.

Credit Burden Brought on by Declining Collateral Value

A significant portion of South Korea's private debt is tied to real estate mortgage loans. The problem is that housing prices serving as collateral, which act as a safety net for loans, are showing a downward trend. Based on real housing prices adjusted for inflation, South Korea has fallen by 16.1% from its peak in 2021. In contrast, U.S. real estate prices maintained a similar level during the same period (Q4 2021 to Q3 2025). When the scale of debt remains large but the collateral value that forms the backbone of the loans decreases, the loan soundness of financial institutions deteriorates. This places a burden on the overall creditworthiness of the national economy and acts as a factor fueling the weakness of the won.

Over the past three years, the real value of the won has dropped, massive debt is suppressing the effect of interest rate cuts, and even creditworthiness is under pressure due to the decline in real estate values. On top of this, U.S. economic growth, led by investments in the AI industry, is sucking in global capital and supporting the strong dollar.

Ultimately, the figure of 1,530 won during intraday trading is the result of compounding short-term shocks such as Middle East risks, but it lays bare the structural cracks in the South Korean economy, whose fundamental strength has weakened while being weighed down by debt. Even if the Korea-U.S. interest rate gap were to disappear completely, the exchange rate will not easily return to its previous position unless it escapes from this structural swamp.

Now, the question thrown to the market has become clear. The old textbook formula that 'the exchange rate will stabilize when interest rates fall' has already lost its power. In a reality where the structural weakness of the won could be prolonged rather than a temporary phenomenon, is our investment portfolio truly prepared to endure this unfamiliar era of high exchange rates? Faced with the truth pointed out by the data, it is time to once again question the investment formulas we have taken for granted.

This article was written by News Epoch by securing and cross-analyzing original macroeconomic data from FRED (Federal Reserve Economic Data of the Federal Reserve Bank of St. Louis), BIS (Bank for International Settlements), and ECOS (Economic Statistics System of the Bank of Korea) through The Proxy collection pipeline.

Data standards: FRED as of March 30, 2026, BIS REER as of February 2026 · Credit/Real Estate as of Q3 2025 (latest release), ECOS as of February 2026.

The exchange rate on March 31 is based on intraday trading.