The U.S. has increased tariffs on South Korean imports to 25%, affecting sectors like automobiles and pharmaceuticals. Initially, the Korean Won (KRW) weakened, but domestic sentiment, policy support, and foreign equity inflows helped stabilise South Korean assets.
Markets show resilience, with a return to ‘risk-on’ mode, driving equities and carry trades in the foreign exchange market. However, underlying challenges from tariffs, volatile rates, especially in Japan, and geopolitical uncertainties remain present.
Influence Of Trade And Geopolitics
The U.S. tariff increase on South Korean imports, along with conditional U.S. security guarantees for Ukraine and the India-EU free trade deal, demonstrates the influence trade and geopolitics have on asset performance and capital flows in the region. These elements continue to steer market dynamics, impacting how assets respond within the broader economic landscape.
We saw late last year how the U.S. increased tariffs on South Korean imports to 25%, initially causing weakness in the Korean Won. Despite the pressure on key sectors like autos, the market found its footing thanks to strong local confidence and policy support. Foreign investment flowing back into Korean stocks was a key factor in stabilizing the situation.
This resilience is confirmed by recent data, which showed net foreign inflows into the KOSPI index exceeded $12 billion in the fourth quarter of 2025. As a result, implied volatility in USD/KRW options has calmed considerably, trading near a six-month low of 7.8% as of last week. This suggests the market is not expecting any major shocks in the immediate term.
For derivative traders, this period of low volatility makes it cheaper to buy options. We believe purchasing call options on the Won, or puts on the USD/KRW, could be a cost-effective strategy over the next few weeks. This offers a way to profit from potential KRW strength while limiting downside risk if trade tensions flare up again.
Broader Market Environment
The broader market environment, which has favored risk-taking since 2025, also supports carry trades funded by the low-yielding Japanese Yen. Historically, sudden moves by the Bank of Japan can unravel these trades, as we saw in brief periods during 2024. Using forward contracts or simple options can help hedge the currency risk from these larger geopolitical and monetary policy uncertainties.
