South Korean Won Plunges as AI Bubble Fears Shake Global Currency Markets

The South Korean won has plummeted to its weakest levels since the 1997-98 Asian financial crisis, driven by renewed concerns over an artificial intelligence bubble and structural capital outflows that threaten to push the currency beyond the psychologically critical 1,500 won per dollar threshold.

Currency Crisis Levels Reached Despite Fed Rate Cuts

Despite the Federal Reserve's recent interest rate reduction, the won-dollar exchange rate surged to 1,479.9 won in after-hours trading on December 12th, dangerously close to the 1,480 won level that South Korean authorities consider a critical resistance point. The December monthly average has already reached 1,470.49 won, marking the highest level in 27 years and nine months.

This dramatic weakening occurred even as the Fed presented what analysts termed a "Goldilocks" scenario of higher growth and lower inflation for the coming year. The disconnect highlights the severity of structural pressures facing the Korean currency.

AI Sector Volatility Triggers Risk-Off Sentiment

The immediate catalyst for the won's decline stems from growing skepticism about artificial intelligence investments in the United States. When semiconductor giant Broadcom suggested AI revenues might disappoint and reports emerged of delays in Oracle's AI data center construction, global markets reacted sharply.

Major semiconductor stocks plunged, with Micron falling 6.7% and Broadcom dropping 11.43%. As risk-off sentiment spread globally, the won, considered a risk currency, bore the brunt of investor flight to safety.

Record-Breaking Annual Performance Looms

The won's struggles appear set to create an unwelcome historical milestone. The 2025 annual average exchange rate currently stands at 1,419.96 won, positioning it to surpass the previous record of 1,394.97 won set during the 1998 currency crisis.

This would mark the first time the annual average has entered the 1,400-won range since South Korea adopted its free-floating exchange rate system in December 1997. Even during major economic disruptions like the dot-com bubble collapse, the September 11 attacks, and the 2008 financial crisis, the won never weakened to these levels on an annual basis.

Structural Headwinds Challenge Recovery Prospects

The won's persistent weakness reflects deeper structural changes in South Korea's economy. Capital outflows have accelerated since 2021 as the National Pension Service and individual investors increasingly seek overseas investment opportunities. This trend has continued despite improvements in South Korea's current account surplus.

KB Securities researcher Oh Jae-young emphasized the severity of the situation: "Capital outflows from Korea to overseas have accelerated, and despite the recovery in the current-account surplus, the exchange rate has continued to rise. Given the high likelihood that the supply-demand imbalance will persist for an extended period, boosting growth through an improvement in manufacturing conditions as well as large-scale foreign investment inflows is needed."

Market Projections Point to Further Weakness

Several brokerage firms are now projecting the won could breach the 1,500 level in the near term, a threshold that would represent uncharted territory for the currency. The prospect reflects concerns that structural capital outflows will continue overwhelming traditional economic fundamentals.

However, some analysts maintain cautious optimism. BNK Investment & Securities researcher Lee Sung-kyung suggests that continued export growth could provide support: "If the expansion in domestic export growth continues, there is a high possibility that next year will see an exchange rate lower than this year."

Policy Implications for Economic Freedom

From a market-oriented perspective, the won's weakness reflects natural adjustments to changing global investment patterns rather than requiring heavy-handed government intervention. The outflow of Korean capital to overseas markets demonstrates the healthy diversification of investment portfolios and the benefits of free capital movement.

Rather than imposing artificial constraints on capital flows, policymakers should focus on creating conditions that naturally attract foreign investment through improved business environments, reduced regulatory burdens, and competitive tax structures. The current situation underscores the importance of maintaining economic flexibility and avoiding protectionist responses that could further undermine market confidence.

The won's trajectory serves as a reminder that in today's interconnected global economy, currency values ultimately reflect underlying economic competitiveness and investor confidence in long-term growth prospects.