As concerns over the U.S. federal deficit continue to grow due to President Donald Trump’s aggressive push for a large-scale tax cut bill, the won-dollar exchange rate has fallen to its lowest level in six months since November last year. The exchange rate, which once approached 1,500 won, has now dropped to the 1,370 won range, drawing significant attention from markets and investors regarding its future trajectory.

On May 21 (Korea time), the won-dollar exchange rate in the Seoul foreign exchange market closed at 1,387.20 won, down 5.20 won from the previous trading day. This closing rate marks the lowest level since November 8 last year (1,386.40 won). In overnight trading, the rate fell sharply to the low 1,370 won range, closing at 1,371.80 won as of 2 a.m. on May 22, a steep decline of 20.60 won from the previous Seoul market close. Compared to the weekly closing rate of 1,387.20 won, it dropped by 15.40 won.

The value of the U.S. dollar has weakened against major currencies. The dollar index, which reflects the dollar’s value against a basket of six major currencies, fell 0.55% from the previous session to 99.57 at the same time. Investors are flocking to safe-haven assets such as the Japanese yen and Swiss franc. On the previous day, the dollar fell 0.55% against the yen to 143.7 yen, and 0.36% against the Swiss franc to 0.825. The British pound hit a three-week high, rising 0.33% to 1.3437 against the dollar.
The weakening of the dollar in the global forex market is largely driven by growing doubts about the fiscal health of the U.S. federal government. President Trump is pressuring lawmakers to pass the “Big Beautiful Bill,” a tax cut package that includes expanding tax reductions, while House Speaker Mike Johnson, a Republican, is rushing to pass the bill before the Memorial Day recess on May 26.

In response, the international credit rating agency Moody’s downgraded the U.S. sovereign credit rating on May 16 from the top-tier “Aaa” to “Aa1,” citing concerns over increasing federal debt and reduced fiscal revenue due to tax cut policies. Moody’s estimated that extending the tax cuts, initially implemented during Trump’s first term in 2017 and set to expire at the end of this year, could add $4 trillion annually to the fiscal deficit over the next decade.
The Congressional Budget Office (CBO) also analyzed that if the tax cut plan is implemented, the federal deficit would increase by $3.8 trillion between 2026 and 2034. The U.S. fiscal deficit for the 2024 fiscal year stands at $1.83 trillion. Recently, IMF First Deputy Managing Director Gita Gopinath told the Financial Times (FT) in an interview, “The U.S. fiscal deficit is too large and needs to be reduced. The ever-growing debt burden must be addressed.”

Fueled by the global decline in the dollar’s value, the won-dollar exchange rate has also reversed sharply downward, drawing market attention to its future direction. Some forecasts have lowered the lower bound of the won-dollar exchange rate. South Korean brokerage firm Ssangyong Securities recently revised its year-end won-dollar exchange rate forecast downward from 1,330 won to 1,300 won. Analysts attribute this to a reduction in the won’s undervaluation amid easing trade war concerns, such as the 90-day truce between the U.S. and China, as well as additional won-strengthening factors from Korea-U.S. currency negotiations.

Kim Yu-mi, a researcher at Kiwoom Securities, stated in a report on May 19, “The won-dollar exchange rate has room to fall to the mid-1,300 won range due to the dollar’s weakness and capital flows into non-U.S. assets. However, after the second half of this year, factors such as the end of the U.S. rate-cutting cycle, the widening interest rate gap between Korea and the U.S., and a lack of growth momentum in Korea could lead to an upward reversal in the exchange rate.”

Reporter Park Hong-yong