"Textbook Theories Don’t Apply": Korea Sweeps Up Dollars With Semiconductor Exports... So Why Is the Exchange Rate Rising? [Weekend Money]

Strong Semiconductor Exports Drive Record Current Account Surplus
Yet the Won Is the Second Weakest Currency in the G20
"Dollars Entered on Paper, but Not in Reality"
Corporations Park Dollars in Overseas Subsidiaries, Individuals Hold Them

From a common-sense perspective, the current upward trend in the exchange rate (decline in the value of the Korean won) is difficult to understand. Semiconductor exports are strong, and the current account surplus is breaking all-time records. Growth forecasts have been revised upward, and even the possibility of a benchmark interest rate hike has been raised. Even considering recent corrections, the domestic stock market is not performing poorly. According to textbook economics, all these factors should lead to a stronger won, that is, factors that would drive the USD/KRW exchange rate down.

On July 8, 2026, market conditions including KOSPI, exchange rates, and KOSDAQ are displayed on the electronic board in the dealing room of the Hana Bank headquarters in Jung-gu, Seoul. Photo by Dongju Yoon

However, reality is the complete opposite. The USD/KRW exchange rate, which was around 1,450 won at the beginning of the year, has now exceeded 1,550 won. In the first half of this year, the US dollar index rose by only 3%, but the value of the Korean won dropped by 8% against the dollar. Among the G20 major currencies, only the Turkish lira has weakened more than the won. And Turkey is well known for high inflation and currency volatility.

Why is the currency of a country that is earning so many dollars through exports so weak?

Major currencies' fluctuation rates compared to the beginning of the year. As of July 1, the Korean won was the currency with the largest depreciation. ＜Source: Hanwha Investment & Securities＞

In a report published on the 3rd, Lim Hyeyoon, a researcher at Hanwha Investment & Securities, identified sentiment as the culprit behind this 'exchange rate mystery.' Both companies and individuals have developed a strong tendency to "hold onto dollars instead of won."

There Is an Overflow of Dollars—On Paper

Current account surplus and net financial account assets both expanded simultaneously. Although only the four months from January to April of 2026 were reflected, it was close to last year's level. ＜Source: Hanwha Investment & Securities＞

The records of financial transactions with foreign countries are called the balance of payments. It is broadly divided into two categories: the 'current account,' which records the results of buying and selling goods and services, and the 'financial account,' which records money moving due to investments in stocks, bonds, and factories. These are useful indicators for tracking inflows and outflows of foreign currency.

Last year, both of these figures reached all-time highs. The current account surplus was 123.1 billion dollars, meaning that sales to foreign countries exceeded purchases by that much, which is a factor that brings dollars into the country. This year, the trend is even steeper. From January to April alone, the goods account surplus was 108.1 billion dollars, a 240% surge compared to a year earlier. Given the strong performance of semiconductor exports, there are even projections that the current account surplus could exceed 300 billion dollars this year.

The other side is also significant. Net financial account assets—which is simply the amount Koreans have invested abroad minus the amount foreigners have invested in Korea—increased by 119.8 billion dollars last year, also hitting a record high. This is a factor causing dollars to leave the country. Last year, there was a surge in overseas stock and bond investments by Koreans, often called "Seohak Ants," and this year, the net assets are expanding as foreigners sharply reduce their investments in Korea.

Dollars Are Not Coming In, but Dollars Are Still Flowing Out

Domestic investment abroad is steadily increasing, while foreign investment domestically is declining. ＜Source: Bank of Korea · Hanwha Securities＞

The problem lies in the gap between the records and reality. While statistics show dollars coming in, in reality, there is money that never actually enters the country.

The most representative example is reinvested earnings. This refers to the profits earned by overseas subsidiaries of Korean companies that are not paid out as dividends but are instead kept locally. In the first four months of this year, this money increased by 124% compared to the previous year. While this boosted the current account surplus, it did not supply dollars to the domestic foreign exchange market.

Even dollars that do come into the country are not being converted into won. The balance of residents' foreign currency deposits (foreign currency held in domestic banks) has increased for two consecutive months. Normally, when the exchange rate rises, people would sell their dollars to realize exchange gains, but instead, they are choosing to hold onto the dollars.

On the other hand, the outflow of dollars is quite active. Although not yet fully reflected in the balance of payments statistics, in May and June, foreigners' selling of domestic stocks was steep. Overseas investments by Koreans are also on track to surpass last year’s record levels.

Even If the Dollar Weakens, the Exchange Rate May Not Fall

On the 2nd, the exchange rate between the Korean won and the US dollar is displayed on the status board in the dealing room of Hana Bank in Jung-gu, Seoul. Photo by Yonhap News

In summary, the actual supply of dollars is less than what the books suggest, while the demand for dollars continues to grow. It is like a bathtub where the inflow of water is less than expected, but the outflow remains unchanged. Naturally, the water level (the value of the Korean won) is falling.

If this diagnosis is correct, it leads to an uncomfortable conclusion: even if the dollar weakens and the Japanese yen rebounds in the second half of the year, the decline in the USD/KRW exchange rate (rise in the value of the won) could be limited. If the force driving up the exchange rate came from sentiment rather than dollar strength, a weaker dollar does not necessarily mean that sentiment will immediately shift as well.

Ultimately, the key point to watch going forward is the direction of sentiment. Will exporting companies start bringing their dollars held overseas back into Korea? Will dollars locked in foreign currency deposits start being converted into won? Will foreigners return to the domestic stock market? Until these trends are confirmed, the question "Why is the exchange rate rising when exports are strong?" is likely to persist.

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