Won Posts Biggest Gain Among Major Currencies Since Late June as Yen Hits 40-Year Low

Won Strengthens Even as Yen Slides, Underscoring Sharp Decoupling

$25.6 Billion From SK Hynix ADR Listing Starts Flowing In

Foreign Investors Turn Net Buyers of Korean Stocks

Exporters Also Rush to Sell Dollars

Weak Japan Growth, Fiscal Expansion Concerns Weigh on Yen

The South Korean won and Japanese yen, which had moved almost in tandem for years, are now diverging sharply. Despite external pressures including war in the Middle East, high oil prices and a stronger dollar fueled by the prospect of further US rate increases, the won has posted the biggest gain among major currencies. The yen, by contrast, has continued to weaken. The shift reflects changes in supply and demand in South Korea’s foreign-exchange market and a gap in the two countries’ economic fundamentals, market participants said.

Dollar Selling Floods Korea’s FX Market

Data from the foreign-exchange market showed on July 26 that the won gained 5.84% against the dollar from late June through July 24. That was the strongest appreciation among major currencies, compared with a 0.11% decline in the euro and a 1.51% drop in the Taiwan dollar. The yen fell 0.93% over the same period.

The won and yen had moved in similar directions in recent years because the two economies shared comparable conditions, including dependence on Middle Eastern oil, large investment plans in the US, household capital outflows and interest-rate differentials with the US. As recently as late June, the one-year correlation coefficient between the won-dollar and yen-dollar exchange rates stood at 0.9. A reading closer to 1 points to stronger co-movement.

By July 24, the one-month correlation between the two had reversed to minus 0.6. The won-dollar rate has dropped by nearly 100 won over the past three weeks, signaling won strength, while the yen-dollar rate has climbed to its highest level in 40 years. The won-yen rate also fell to 895.44 won per 100 yen, the lowest in about one year and eight months.

The main driver of the divergence is a turn in the won as supply and demand conditions in South Korea’s FX market shifted. The $25.6 billion raised through SK Hynix’s American depositary receipt listing began flowing into the domestic FX market, quickly changing sentiment. As the view spread that the exchange rate had reached a short-term peak, other exporters also moved to step up dollar sales.

A slowdown in foreign selling of Korean stocks also supported the won. Foreign investors, who were net sellers of 149 trillion won in the Kospi in the first half and contributed to won weakness, turned into net buyers of 2.546 trillion won from July 13 through July 24. An FX dealer at a local bank said expectations for SK Hynix dollar sales mean the exchange rate tends to fall sharply when it declines, while rebounds are capped when it rises. The mood has completely shifted from a month ago, the dealer added, and short-dollar trades are increasingly seen as effective.

Korea-Japan Economic Fundamentals Also Shape FX Moves

Differences in economic fundamentals and monetary-policy direction have also split the paths of the two currencies. As expectations grow that South Korea’s economy will expand well above 3% this year on the back of a semiconductor boom, market participants are betting the Bank of Korea will raise interest rates at least two or three more times.

The International Monetary Fund recently cut its 2026 growth forecast for Japan to 0.6% from 0.7% in April. Expectations that the Bank of Japan will move slowly on further rate increases as the Japanese government maintains an expansionary fiscal stance are also weighing on the yen. If that trend continues, the Korea-US and US-Japan interest-rate gaps, now at 1.0 percentage point and 2.5 percentage points, respectively, stand to widen further. Ha Geon-hyeong, a research fellow at Shinhan Securities, said capital outflows through yen carry trades remain heavy because the BOJ is tightening only gradually.

Experts said the won-yen decoupling is set to continue for now. Unless the Kospi rebounds to its previous peak, foreign selling of Korean equities is unlikely to return to earlier levels, while SK Hynix’s dollar sales should continue to support the won for the time being. Still, some expect the pace of declines in the won-dollar rate to slow after next month, when most of the SK Hynix-related flows have been absorbed. If bargain demand for dollars picks up, the won-dollar rate could trade around 1,450 won.

The yen’s direction is expected to hinge on developments in the Middle East and whether the BOJ delivers additional rate increases. A prolonged war in the region could deepen concerns about further US monetary tightening, strengthening the dollar and putting more pressure on the yen.

Shim Seong-mi, Hankyung.com reporter smshim@hankyung.com