Despite a sharp decline in the KOSPI, the won-dollar exchange rate continues to trend downward. Typically, a weak domestic stock market leads to a rise in the exchange rate; however, recent analysis indicates that a decrease in dollar demand following the end of foreign investor rebalancing, along with expectations of corporate dollar sales, has contributed to the strengthening of the won.
On July 30, the weekly closing price of the won-dollar exchange rate in the Seoul foreign exchange market ended at 1,437.4 won, down 9.3 won from the previous trading day. This marks the lowest level since February 26 (1,425.8 won), just before the outbreak of conflict in the Middle East, effectively reversing most of the risk premium that had been reflected since the war began.
Earlier, during the KOSPI's rise in May and June, foreign capital inflows and rebalancing led to a surge in dollar buying, pushing the exchange rate up to as high as 1,560 won. However, as the domestic stock market faced corrections in July, the demand for additional dollar purchases by foreign investors significantly decreased, leading to a rapid decline in the exchange rate.
The recent divergence between the exchange rate and the stock market is attributed to improvements in dollar supply and demand. Typically, when stock prices fall, the exchange rate rises, but the end of the semi-annual rebalancing has reduced dollar demand, allowing the won-dollar exchange rate to drop to the 1,430s despite dollar strength and increased stock market volatility.
Additionally, the decline in international oil prices due to easing tensions in the Middle East has supported the strength of the won. The listing of SK Hynix's American Depositary Receipts (ADRs) has also contributed to the demand for currency exchange, while the Bank of Korea's interest rate hike has narrowed the interest rate gap between South Korea and the U.S., further influencing the drop in the exchange rate.
Market analysts believe that the recent decline in the exchange rate is more influenced by domestic factors than by a weakening U.S. dollar. The second quarter economic growth rate, which exceeded market expectations, expectations of a narrowed interest rate gap between South Korea and the U.S., demand for currency exchange related to SK Hynix ADRs, and corporate conversions to won have all contributed to improved dollar supply and demand.
Kim Yu-mi, a researcher at Kiwoom Securities, stated, "Expectations for further increases in the won-dollar exchange rate among market participants have weakened compared to before," adding, "In the short term, a key variable will be whether this sentiment can be sustained." She further noted that whether the approximately $85.6 billion in dollar deposits held by companies will lead to conversions to won depends on perceptions of the exchange rate direction and domestic investment demand.
However, it remains uncertain how long the downward trend in the exchange rate will continue. Geopolitical risks in the Middle East have not been fully resolved, and uncertainty surrounding the Federal Reserve's monetary policy path has increased following the recent Federal Open Market Committee (FOMC) meeting.
Park Sang-hyun, a researcher at iM Securities, commented, "Given the recent sharp decline in the won-dollar exchange rate, the potential for further decreases may be limited, but there is a possibility that the trend of a weaker dollar will continue post-FOMC," adding, "The lower limit for the exchange rate could be around 1,400 won." He also noted that as the demand for currency exchange related to SK Hynix ADRs is mostly absorbed, the divergence between the exchange rate and stock prices may gradually diminish.
* This article has been translated by AI.
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