Won Nears 1,600 per Dollar as Q2 Average Hits Highest Since Financial Crisis

Current-account surplus and stock surge backfire

Won breaks through key 1,550 psychological level

The won has broken below the key psychological threshold of 1,550 per dollar. The average won-dollar exchange rate in the second quarter climbed to its highest level since the Asian financial crisis 28 years ago, underscoring the currency’s accelerating decline. A record current-account surplus fueled by a semiconductor export boom and a sharp stock rally are, paradoxically, adding to pressure on the won.

According to the Seoul foreign-exchange market, the won weakened to as low as 1,561.5 per dollar in night trading on June 6. That marked the highest level since March 6, 2009, when the rate hit 1,597.0 during the global financial crisis. Trading ended at 2 a.m. on June 7 at 1,559.0 per dollar, up 1.43%, or 19.9 won, from the daytime close of 1,539.1. The average exchange rate from the start of the second quarter through June 5 stood at 1,490.98 per dollar, the highest since the first quarter of 1998, when it averaged 1,596.88 as the financial crisis intensified.

The biggest reason the exchange rate remains elevated despite the semiconductor boom is net selling of Korean stocks by foreign investors. As chip shares surged, Samsung Electronics Co. and SK Hynix Inc. took up a much larger share of global portfolios, prompting investors to trim positions mechanically. Investors who bought on expectations of further gains in semiconductor shares have also been selling won through currency hedges to reduce foreign-exchange risk. At the same time, exporters flush with dollars have been reluctant to convert them into won as they plan to reinvest overseas. That has drained the dollar selling that would normally support the Korean currency.

Foreign investors hold Korean stocks but sell the won, amplifying pressure through currency hedging

The better stocks and exports perform, the higher the exchange rate climbs — the old formula has changed

Export booms and stock-market rallies once provided strong support for the won. Now they are weighing on it. As the Kospi rises, foreign investors sell won to rebalance portfolios and hedge currency exposure. Dollars earned from semiconductor exports are also being reinvested abroad, limiting support for the domestic foreign-exchange market. Some analysts have gone so far as to argue that semiconductors are replacing crude oil as a source of dollar liquidity, signaling a shift from the era of the petrodollar to what they call the “DRAM dollar.”

Foreign investors offset National Pension Service hedging

According to the Bank of Korea, the average won-dollar exchange rate this year through June 5 stood at 1,477.06 per dollar. That was more than 50 won above last year’s record annual average of 1,420.97. So far this month, the won-dollar rate has jumped 3.48% in a week, the second-largest increase against the dollar after the Russian ruble’s 3.54%.

The won’s continued weakness reflects heavy foreign selling of Korean stocks. On June 5, the Kospi stood at 8,160.59, up 94% from the start of the year. Shares of Samsung Electronics and SK Hynix, South Korea’s two biggest semiconductor stocks, rose at an unusually rapid pace. As a result, the weighting of Korean equities, particularly chipmakers, in funds run by global asset managers rose sharply for a time. Global funds are generally known to rebalance when a single stock exceeds 10% of a portfolio or when the combined weighting of holdings above 5% rises past 40%.

As Samsung Electronics and SK Hynix grew to occupy a larger share of portfolios, foreign investors took profits and exited the market after converting proceeds into dollars instead of rotating into other Korean shares. That accelerated won selling. Since April, about $18.7 billion has flowed in following South Korea’s inclusion in the World Government Bond Index, or WGBI. Since the introduction of the Repatriated Investment Account, or RIA, overseas investment funds held by Korean retail investors worth 1.9443 trillion won had returned to the domestic market through May 19. Even so, that was not enough to offset the pressure.

Foreign investors’ currency hedges are also adding to won selling. In effect, they are buying Korean semiconductor stocks while selling the won, reflecting confidence in the shares but concern over further currency weakness. The National Pension Service has been selling dollars through currency hedges to help stabilize the exchange rate, but the effect is being diluted by much larger foreign hedging flows in the opposite direction. The interest-rate gap between South Korea and the US has made such hedges even more attractive, because investors can also capture a hedge premium from the rate differential.

‘Semiconductor dollars’ erase won buying

Another reason won buying has faded is that Korean chipmakers are reinvesting in the US the dollars earned from the artificial-intelligence boom. Brad Setser, a senior fellow at the Council on Foreign Relations, has described the phenomenon as the “DRAM dollar.” The idea is that East Asia’s information-technology exports, especially semiconductors, are taking over the role once played by crude oil during the petrodollar era, when Middle Eastern oil producers reinvested dollar earnings in the US and helped sustain dollar hegemony.

That also means a surge in semiconductor exports and a widening current-account surplus no longer automatically translate into won buying in the domestic foreign-exchange market.

Repeated verbal intervention by the authorities has had little effect. The market’s conviction that the exchange rate will keep rising has strengthened self-fulfilling expectations, prompting participants to buy dollars in advance and push the rate even higher.

On June 7, Koo Yun-cheol, deputy prime minister and minister of economy and finance, held an emergency market-monitoring meeting and said authorities would inspect speculative trading and suspected market-disrupting activity through reviews by the Bank of Korea and the Financial Supervisory Service. They also plan to investigate whether importers and exporters engaged in illegal transactions by rushing import payments or excessively delaying receipt of export proceeds to benefit from the won’s decline.

Jeong Young-hyo, Korea Economic Daily reporter / Bin Nan-sae, New York correspondent hugh@hankyung.com