The won has attracted speculative foreign capital since April 2009, much of it funded by the US dollar carry trade (whereby investors borrow in low-yielding currencies, such as the US dollar, and invest in countries where interest rates are higher). This helped to push up the value of the won against the dollar until early 2010, when the onset of the debt crisis in Europe led banks to deleverage, putting downward pressure on the won. The impact of the fluctuating value of the local currency as a result of changes in sentiment has raised serious concerns about the possible impact of won volatility on South Korea's economic recovery. To help prevent further damaging fluctuations in the won's value, in late 2010 the government reimposed taxes on interest and capital gains on South Korean government bonds owned by non-residents. (Taxes on interest and capital gains had been waived since May 2009.) This measure, along with others implemented since mid-2010, is designed to control potentially destabilising capital flows. We expect the won to strengthen on an annual average basis from W1,156.2:US$1 in 2010 to W1,065:US$1 in 2015. However, there are significant risks to this forecast. The won will remain vulnerable to changes in investor risk appetite, and also to geopolitical developments. Notably, elevated tensions with North Korea could put downward pressure on the currency in international foreign-exchange markets in 2011-15.