South Korea hit by oil, currency, stock shocks

The South Korean won briefly surpassed 1,500 per U.S. dollar in after-hours trading on March 4, the first time since March 2009 during the global financial crisis. The surge reflected a flight to safe-haven assets amid U.S. and Israeli airstrikes on Iran, strengthening the dollar and weakening the won.

The KOSPI closed at 5,093.54 on March 4, down 12.06% from the previous day. This marked the largest one-day drop in history, exceeding the 12.02% fall on Sept. 12, 2001, following the 9/11 attacks. Earlier this year, the KOSPI had surged past 5,000 and 6,000 points, briefly reaching 6,300, but it could not withstand the shock from the Middle East conflict. Analysts said the particularly steep decline reflected caution after rapid gains and the vulnerability of South Korea’s economy and industrial structure, which relies heavily on Middle Eastern energy imports.

Volatility in financial markets is expected to remain high depending on developments in the Middle East. South Korea’s benchmark “fear gauge,” the KOSPI200 Volatility Index (VKOSPI), soared to a record 80.37 on March 4. Analysts advised investors to focus on risk management rather than leveraged speculation.

Iran’s blockade of the Strait of Hormuz and retaliatory strikes on regional oil and gas facilities have pushed international crude prices higher. Although U.S. President Donald Trump pledged insurance and naval escorts for vessels passing through the strait, the move only slightly moderated price increases. Brent crude reached $85 per barrel, the highest in 19 months, while West Texas Intermediate hovered around $75 per barrel.

Restrictions on Middle Eastern oil imports, combined with a weaker won, are expected to push domestic gasoline prices higher in two to three weeks. Rising international crude prices could also increase logistics costs, electricity and gas bills, import prices, and restaurant prices. Economists projected that South Korea’s annual inflation could rise to 2.5%, above the Bank of Korea’s forecast of 2.2%. Policymakers must prepare for a potential “three-high” scenario of high oil prices, high exchange rates, and high inflation if the Middle East conflict escalates or continues for an extended period.

If the conflict eases and the blockade of the Strait of Hormuz ends quickly, the impact on South Korea’s financial markets and real economy may be limited. The greater risk is a prolonged conflict, which could trigger global stagflation by combining rising inflation with slower economic growth. South Korea could face weaker exports and muted domestic consumption. Authorities should prepare for long-term disruption by reviewing energy and food distribution systems and implementing measures to ease household cost pressures.