"Plunging 220 Won in Two Months: What Drove the Won's Rollercoaster Ride? [Exchange Rate Swings, the Logic Has Changed]①"

Exchange Rate Falls by 219.7 Won in Just Two Months
Won Value Jumps 15.7% Against US Dollar in Q3
The Logic of "Current Account Surplus = Stronger Won" Is Changing
"Focus Shifts to Foreign Investment Patterns and Redistribution Flows"
Hynix AD

This year, the KRW-USD exchange rate has experienced a rollercoaster pattern, with a sharp surge followed by a rapid decline over a short period. Notably, while expectations earlier this year were tilted toward further increases, sentiment shifted dramatically to the downside in the second half. This led to an additional drop in the exchange rate by nearly 220 won within just two months, with further declines (KRW appreciation) now being forecast. Experts note that the longstanding logic of "current account surplus = stronger KRW" no longer holds, and say attention should now be focused on how the semiconductor supercycle influences dollar supply and the resulting shifts in market sentiment.

On the 8th, employees are monitoring the stock market and exchange rates at the Hana Bank headquarters in Jung-gu, Seoul. Photo by Yonhap News

Exchange rate drops by 219.7 won in two months... KRW value rises 15.7% vs. USD in Q3

According to the Bank of Korea Economic Statistics System (ECOS) on September 10, the KRW-USD exchange rate (based on weekly closing prices) plunged from 1,555.8 won on July 2 to 1,336.1 won on September 9—just over two months. The volatility of the weekly closing rate for the third quarter alone is 219.7 won. If considering intraday highs and lows, the difference widened to 224.6 won over the same period.

It is unusual for the exchange rate to plummet so dramatically in such a short time. Since the global financial crisis, such a large intraday fluctuation (difference between high and low) has occurred only during the period when the U.S. began monetary tightening—between late October 2022, when the rate was 1,444.2 won, and early February 2023, when it dropped to 1,216.4 won, a decrease of 227.8 won. At that time, as perceptions grew that U.S. inflation had peaked, expectations rose that the U.S. Federal Reserve would pivot to easing, leading to a retreat in the strong dollar trend. During the COVID-19 pandemic, the difference between the high and low was 215.7 won—smaller than the current episode. Back then, the exchange rate soared to 1,296.0 won in March 2020, but dropped to 1,080.3 won at the end of the year thanks to the Korea-U.S. currency swap agreement, increased liquidity, and vaccine development expectations.

The issue is that the exchange rate also followed an unprecedented trajectory when it surged to new highs earlier this year. Starting at just over 1,400 won in early 2024, the rate shot up to the 1,560 won range in June, marking the highest level in 17 years since the global financial crisis. In the second quarter, the rate jumped from the low 1,430 won range in early May to over 1,560 won by the end of June, recording a swing of 121.9 won. Following this exceptional surge, the rate reversed course with an extraordinary decline. Against the U.S. dollar, the KRW's depreciation rate was -7.10% in the first half, greater than that of the Indonesian Rupiah (-6.92%), Thai Baht (-5.39%), Japanese Yen (-3.52%), Canadian Dollar (-3.33%), and Euro (-2.76%) among major currencies. However, in the third quarter, the KRW rebounded sharply, appreciating by 15.71%, standing out against the Yen (5.86%), Rupiah (2.61%), Euro (2.25%), and Baht (1.40%).

New Fundamentals Driving KRW Strength: Why Exporters Holding Dollars Have Changed Course

The logic behind KRW strength has shifted. Market participants now focus less on current account and external fundamentals themselves and more on how accumulated foreign currency reserves are held as external assets and how they are redistributed through financial accounts. In the first half of this year, Korea posted a current account surplus of USD 191 billion, or 1.5 times last year’s record annual surplus. This was the second largest globally after China. Nevertheless, in late 2025, outbound equity investments by domestic investors (“Seohak Ants”), and in the first half of this year, the net sale of Korean stocks by foreign investors were the driving factors behind the exchange rate’s movement.

As more funds were allocated to overseas investments and net external assets increased, current account surpluses were funneled into foreign investments rather than domestic conversion, at times placing depreciation pressure on the KRW. According to Cha Younghoo, a researcher at Eugene Investment & Securities, "Since 2023, the synchronization between securities/direct investment outflows and KRW weakness has strengthened." He explained, "Net outflows from securities and direct investments reached an annualized USD 130 billion over the past 36 months, surging to USD 212 billion in just the most recent 12 months." The strong bias toward selling KRW and buying USD drove the exchange rate up sharply. Expectations for a rising exchange rate led investors to delay selling dollars, increase their exposure to exchange rate fluctuations (“FX open” ratio), and thereby fuel further increases in the exchange rate.

The abrupt turnaround was triggered by influxes of funds from SK hynix’s U.S. American Depositary Receipt (ADR) issuance. This was followed, around August tax payment deadlines, by major corporations chasing the dollar with additional sales, and an increase in hedging ratios at heavy manufacturing companies. The government’s three “mega projects” (semiconductors, physical artificial intelligence, and AI data centers) and the shareholder return policies of Samsung Electronics and SK hynix also served to push the exchange rate lower. This drop in the exchange rate spurred additional FX conversion demand by major exporters, further amplifying the decline. Exporters had held off on selling dollars in the first half of the year, widening the disconnect between fundamentals and the exchange rate, so their reversal of stance is widely viewed in the market as a key driver behind the rapid drop in the KRW-USD rate.

The capital outflow pressures that previously contributed to a higher exchange rate have now eased significantly. In July, the current account surplus stood at USD 42.08 billion, the second highest on record, but direct investment totaled just USD 4.13 billion and securities investment reached only USD 5.4 billion. According to Lee Junghoon, an economist at Daishin Securities, "From the second half of last year to the first half of this year, overseas securities and equity investments accounted for 65% and 82% of the current account balance, respectively, but by July, these shares had dropped to just 13% and 15%," he pointed out.

"What to Do with the Dollars Earned?"...The Key to Future Exchange Rate Trends

The consensus is that the exchange rate will continue to test further declines for the time being. On the supply and demand side, just factoring in the domestic investment effect of Samsung and SK Group’s shareholder return policies and government mega project initiatives—totaling KRW 4,755 trillion—means these outweigh capital outflow risks. Researcher Cha stated, "Assuming both companies continue to return about 50% of cumulative free cash flow (FCF) to shareholders, annual shareholder returns are expected to reach around KRW 220 trillion." He estimated, "If over the next year, both companies convert 60% of the returns, and if there is a 30% remittance offset (which cancels out the FX effect) for dividends and share buybacks, up to KRW 92.5 trillion in net KRW conversion could be realized on an annualized basis."

Moon Down, a researcher at Korea Investment & Securities, commented, "Given the current state of the U.S. economy and the labor market, I expect the policy rate to remain unchanged for the rest of the year," and also projected the dollar index, currently at 98, to fall further. Expectations for the Bank of Korea’s policy rate, currently at 3.00% annually, are also rising, which suggests steady demand for KRW funding—especially among semiconductor exporters. According to Lee Jingyeong, an economist at Shinhan Investment & Securities, "With FX conversion postponed in the first half of the year, FX deposits and pending funds have built up, so in the second half, FX conversion demand could expand, particularly due to incentive payments and currency risk management requirements."

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