Last month, the won-dollar exchange rate fell by over 125 won, dropping to the low 1400s. Strong export performance and corporate demand for currency exchange supported this short-term decline, but ongoing structural demand for dollars due to domestic overseas investments suggests a return to the previous range of 1200-1300 won is unlikely in the medium to long term.
According to the Seoul foreign exchange market on August 2, the won-dollar exchange rate closed at 1424.0 won as of 3:30 PM on July 31. This marks a decrease of 125.4 won from 1549.4 won at the end of June, representing the largest monthly drop since March 2009, when exchange rate volatility surged during the global financial crisis.
The won appreciated against the dollar by 8.81% last month, the highest rate since March 2009. The exchange rate peaked at 1559.2 won on July 1 before falling to 1418.0 won on July 30, the lowest level in nine months.
The recent sharp decline in the exchange rate has been influenced by improvements in foreign exchange market supply and demand. Analysts attribute the increase in dollar supply to funds related to SK Hynix's American Depositary Receipt (ADR) issuance and export companies' negotiation volumes. Additionally, the Bank of Korea raised its benchmark interest rate from 2.50% to 2.75% last month, narrowing the interest rate gap between South Korea and the U.S., which also supported the won's strength.
Strong export performance is another factor contributing to the short-term decline in the exchange rate. According to the Ministry of Trade, Industry and Energy, July exports surged by 62.8% year-on-year to $98.89 billion, marking the second-highest monthly total on record. Semiconductor exports reached $41.01 billion, a staggering increase of 178.8%, while the trade balance recorded a surplus of $30.32 billion.
In August, continued demand for currency exchange from companies preparing for corporate tax prepayments is expected.
However, analysts caution that this short-term decline in the exchange rate is unlikely to lead to a sustained appreciation of the won in the medium to long term. According to a report by Samsung Securities, an analysis of exchange rate fluctuations from early 2022 to June 2023 revealed that the current account surplus exerted a downward pressure of 29 percentage points on the won-dollar exchange rate. Conversely, domestic investments in overseas securities created an upward pressure of 29 percentage points, effectively offsetting the impact of the current account surplus. Samsung Securities also noted that foreign capital outflows and risk premiums have contributed to the weakness of the won.
The gap between economic fundamentals and the actual exchange rate has widened. The value of the won, reflecting productivity, trade conditions, net foreign assets, and real interest rate differentials, is estimated to be undervalued by about 26% compared to its equilibrium level. While improvements in trade conditions due to strong semiconductor exports suggest a strengthening of the won's equilibrium value, the actual value has not kept pace.
Before the COVID-19 pandemic, exchange rates typically returned to equilibrium levels after about 14 months, even if they deviated. However, since 2020, this resilience has weakened, influenced by structural dollar demand from domestic investments in overseas securities and acquisitions of foreign assets by institutions and corporations.
Samsung Securities predicts that if South Korea follows a path similar to Germany, where trade surpluses and overseas investments continue, the won-dollar exchange rate could fluctuate between 1430 and 1485 won. If it follows Taiwan's trajectory, characterized by a large trade surplus centered on semiconductors and accumulation of overseas assets, the rate could rise to the 1500 to 1600 won range by 2030.
Choi Ye-chan, a researcher at Samsung Securities, stated, "Regardless of which scenario South Korea follows, the conclusion remains that higher exchange rates than in the past will persist. A meaningful appreciation of the won will only be possible when the speed of foreign currency reflows slows and incentives for domestic and foreign capital to return to Korea arise."
According to the Seoul foreign exchange market on August 2, the won-dollar exchange rate closed at 1424.0 won as of 3:30 PM on July 31. This marks a decrease of 125.4 won from 1549.4 won at the end of June, representing the largest monthly drop since March 2009, when exchange rate volatility surged during the global financial crisis.
The won appreciated against the dollar by 8.81% last month, the highest rate since March 2009. The exchange rate peaked at 1559.2 won on July 1 before falling to 1418.0 won on July 30, the lowest level in nine months.
The recent sharp decline in the exchange rate has been influenced by improvements in foreign exchange market supply and demand. Analysts attribute the increase in dollar supply to funds related to SK Hynix's American Depositary Receipt (ADR) issuance and export companies' negotiation volumes. Additionally, the Bank of Korea raised its benchmark interest rate from 2.50% to 2.75% last month, narrowing the interest rate gap between South Korea and the U.S., which also supported the won's strength.
Strong export performance is another factor contributing to the short-term decline in the exchange rate. According to the Ministry of Trade, Industry and Energy, July exports surged by 62.8% year-on-year to $98.89 billion, marking the second-highest monthly total on record. Semiconductor exports reached $41.01 billion, a staggering increase of 178.8%, while the trade balance recorded a surplus of $30.32 billion.
In August, continued demand for currency exchange from companies preparing for corporate tax prepayments is expected.
However, analysts caution that this short-term decline in the exchange rate is unlikely to lead to a sustained appreciation of the won in the medium to long term. According to a report by Samsung Securities, an analysis of exchange rate fluctuations from early 2022 to June 2023 revealed that the current account surplus exerted a downward pressure of 29 percentage points on the won-dollar exchange rate. Conversely, domestic investments in overseas securities created an upward pressure of 29 percentage points, effectively offsetting the impact of the current account surplus. Samsung Securities also noted that foreign capital outflows and risk premiums have contributed to the weakness of the won.
The gap between economic fundamentals and the actual exchange rate has widened. The value of the won, reflecting productivity, trade conditions, net foreign assets, and real interest rate differentials, is estimated to be undervalued by about 26% compared to its equilibrium level. While improvements in trade conditions due to strong semiconductor exports suggest a strengthening of the won's equilibrium value, the actual value has not kept pace.
Before the COVID-19 pandemic, exchange rates typically returned to equilibrium levels after about 14 months, even if they deviated. However, since 2020, this resilience has weakened, influenced by structural dollar demand from domestic investments in overseas securities and acquisitions of foreign assets by institutions and corporations.
Samsung Securities predicts that if South Korea follows a path similar to Germany, where trade surpluses and overseas investments continue, the won-dollar exchange rate could fluctuate between 1430 and 1485 won. If it follows Taiwan's trajectory, characterized by a large trade surplus centered on semiconductors and accumulation of overseas assets, the rate could rise to the 1500 to 1600 won range by 2030.
Choi Ye-chan, a researcher at Samsung Securities, stated, "Regardless of which scenario South Korea follows, the conclusion remains that higher exchange rates than in the past will persist. A meaningful appreciation of the won will only be possible when the speed of foreign currency reflows slows and incentives for domestic and foreign capital to return to Korea arise."
* This article has been translated by AI.
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