This paper constructs a monthly financial effective exchange rate index of Korea and investigates the relationship between the financial effective exchange rate and the external position and that between the financial effective exchange rate and capital flows. It turns out that sometimes the exchange rate index and the traditional BIS trade-weighted index move in opposite directions. The relative volatilities of the two indices are also different. The net foreign exposure of Korea as of 2014 shows that a 1% depreciation of the Won results in a 0.48% increase in the valuation of the external position. Empirical results show that the increase in the rate of change of the financial effective exchange rate significantly leads to capital outflows, especially in portfolio investment and bond investment in particular. The use of the financial effective exchange rate is better equipped than the traditional trade-weighted exchange rate in explaining and estimating the wealth effects of the changes in net external positions.