Inflow of Dollars Linked to SK hynix ADR Listing
Decrease in Net Foreign Selling in the Korean Stock Market
Third Quarter Exchange Rate to Be Driven by Foreign Investment and Oil Prices
The won-dollar exchange rate, which had climbed to the mid-1,500 won range, has been adjusting downward for a week, staying below 1,490 won. According to experts as of July 23, the future trajectory of the exchange rate will be determined by trends in oil prices driven by the renewed Middle East conflict, foreign capital flows in the domestic stock market, and the interest rate gap between South Korea and the United States.
According to the Bank of Korea’s Economic Statistics System (ECOS), the won-dollar exchange rate peaked at 1,554.4 won (base rate) on July 2 and started to decline, falling to 1,475.6 won on July 22. On July 15, it hit 1,492.2 won, breaking the 1,500 won threshold, and since July 16, it has remained below 1,490 won, fluctuating between the 1,470 and 1,480 won ranges. As of 10:58 a.m. on the morning of July 23, the won-dollar rate was trading at 1,468.4 won on the Seoul foreign exchange market, down 13.2 won from the previous trading day’s closing rate at 3:30 p.m.
While the resumption of the Middle East war following the U.S. airstrike on Iran has led to a stronger dollar, the domestic factors supporting the won include the inflow of dollars related to the listing of SK hynix American Depositary Receipts (ADR) starting July 14, decreased net foreign sell-offs in the local stock market, and the government’s exchange rate stabilization policies.
Funds from the SK hynix ADR listing (26.5 billion dollars) began flowing into the domestic market on July 14 and are expected to continue through August. Additionally, steady exports led by semiconductor companies have increased hedging activity among exporters, which has also contributed to the exchange rate’s decline.
Although foreigners were net sellers of over 50 trillion won on the KOSPI last month, their net sales volume was reduced to 24 trillion won during the July 1–10 period. From July 13 to July 22, foreigners were net buyers of 3.672 trillion won. Active verbal intervention by the government and foreign exchange authorities, the opening of the 24-hour foreign exchange market, and the Bank of Korea’s Monetary Policy Board’s 0.25 percentage point base rate hike have also contributed to the rise in the value of the won.
Market participants anticipate that trends in foreign investors’ net buying and selling will have a significant impact on future won-dollar exchange rates. Park Sanghyun, economist at iM Investment & Securities, stated, “The supply-demand environment has improved since the SK hynix ADR listing, and the reduced net selling by foreigners in July is another positive factor. The extent to which net selling further declines will also be a key variable.” Moon Jeonghee, chief economist at KB Kookmin Bank, added, “As stock prices have adjusted, we have seen a synchronized trend of reduced foreign selling and a lower exchange rate. If stock prices rise, profit-taking could increase selling pressure, driving the exchange rate up.” She further noted, “This synchronized movement between the stock index and the won-dollar rate is likely to continue for the time being.”
The rise in oil prices caused by the renewed Middle East conflict, along with potential changes in the U.S. Federal Reserve’s interest rates that affect the Korea-U.S. interest rate differential, are also expected to influence exchange rates. International oil prices, which had dropped to around 70 dollars per barrel during the U.S.-Iran ceasefire, have recently surpassed 80 dollars per barrel. On this day, September delivery West Texas Intermediate (WTI) futures closed at 86.83 dollars per barrel, up 2.95% from the previous session. September delivery Brent crude futures surged 3.36% to close at 94.07 dollars per barrel.
Baek Seokhyun, economist at Shinhan Bank, commented, “Although oil prices are rising, the foreign exchange market seems to view current price levels as within a familiar fluctuation range. If oil prices exceed this range, the reaction in the foreign exchange market could become much more pronounced.”
The question of whether the U.S. Federal Reserve will raise its benchmark interest rate remains a key point. Should the Federal Open Market Committee (FOMC)’s regular meeting in the early morning of July 30 (Korea Standard Time) result in a hike above the current 3.75% benchmark interest rate, the widening Korea-U.S. rate differential could push the won-dollar exchange rate higher. Conversely, if the Fed holds rates steady, it is likely that the won-dollar exchange rate may fall further.
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Park Hyungjoong, economist at Woori Bank, stated, “If the Fed hikes rates later this year, the exchange rate could rise back to 1,500 won next month. Further depreciation of the yen, which has recently moved in tandem with the won, could also increase exchange rate volatility.” On the other hand, Park Sanghyun and Chief Economist Moon noted that, given inflation and employment indicators, the Fed is unlikely to raise rates, adding, “We expect the exchange rate to decline through the third quarter.”
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