Despite Record Trade Surplus, Soaring Exchange Rate May Hit 1,600 Won [Weekend Money]

High Exchange Rate Expected to Persist
Amid Large-Scale Foreign Sell-Off of Korean Stocks

As the KRW-USD exchange rate continues to rise, there are expectations that this trend will persist in the second half of the year unless foreign investors' selling of Korean stocks subsides.

According to Kyobo Securities on July 4, the KRW-USD exchange rate, which surpassed 1,500 won in May, has steadily climbed, reaching the 1,550 won range this month. The main driver behind the rise in the exchange rate is believed to be the rebalancing sell-offs by overseas passive funds. Kyobo Securities noted that, given the relative returns in global stock markets, this rebalancing-driven selling is likely to continue for some time.

According to Kyobo Securities, the cumulative amount of Korean stocks sold by foreign investors since the beginning of this year has reached approximately $98 billion (based on an exchange rate of 1,500 won). This is an enormous amount comparable to the accumulated trade surplus in the first half of the year, which was expected to serve as a relief factor for the undervalued won, at around $138 billion. While semiconductor companies tend to retain dollars earned from exports rather than fully converting them domestically, the funds from foreign investors' stock sales are directly converted into demand for dollars, further pushing up the exchange rate.

The problem is that this selling pressure is likely to persist for the time being. Passive funds place more importance on the relative return of the KOSPI compared to its benchmark, the MSCI EM (Emerging Markets) Index, rather than the absolute level of the KOSPI itself. Currently, the Korean stock market’s relative performance remains high.

Wi Jaehyun, Senior Researcher at Kyobo Securities, said, “The issue with rebalancing is not only its persistence but also its scale. Despite the ongoing direct and indirect interventions by the foreign exchange authorities in response to the elevated exchange rate, if rebalancing-driven selling continues in the second half of the year, there are no clear factors to cap the exchange rate at the upper end.” He added that it is necessary to keep the upper limit for the exchange rate open up to 1,600 won within the third quarter.

The foreign exchange authorities' capacity to defend the currency is not ample. Considering past patterns and the current level of foreign reserves, the maximum amount that authorities can deploy for market stabilization in the second half of the year is estimated to be around $50 billion.

However, from a long-term perspective, Wi noted that there are signs the value of the won could stabilize. This is because large-scale domestic investments by major conglomerates, such as the government-led 'semiconductor megaproject,' are expected. Since the scale of these domestic investments is larger than the total amount of voluntary overseas and U.S. investments by private companies, there will be an increasing incentive for export companies to repatriate overseas funds previously held abroad back to Korea.

Furthermore, if there is a structural shift in which overseas asset investments that expanded after the COVID-19 pandemic are increasingly repatriated in the form of dividends and interest income, this is expected to serve as a buffer to gradually ease upward pressure on the exchange rate.

This content was produced with the assistance of AI translation services.