Q2 Average Exchange Rate Exceeds 1,500 Won… First Time in 28 Years Since the Financial Crisis

Average at 1,500.1 won from April 1 to June 26
Highest since Q1 1998 (1,596.8 won)
Continued foreign capital outflows due to “portfolio rebalancing”
Korean won expected to remain under depreciation pressure for now

The average KRW-USD exchange rate for the second quarter of this year is expected to surpass 1,500 won for the first time in 28 years since the Asian financial crisis. Analysts say that the continued outflow of foreign capital due to the stock market rally will keep the Korean won under depreciation pressure for the time being.

On the 26th, the Seoul Jung-gu Hana Bank dealing room status board displayed the KOSPI index and the KRW-USD exchange rate. Photo by Yonhap News Agency

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According to the Bank of Korea’s Economic Statistics System, from April 1 to June 26, based on the closing price of weekly trading at 3:30 p.m., the average KRW-USD exchange rate stood at 1,500.1 won. Considering the weekly closing price on June 26 (1,532.0 won), the quarterly average exchange rate is projected to exceed 1,500 won, even after factoring in the remaining two trading days in June. This is the first time in 28 years and three months since the first quarter of 1998 during the Asian financial crisis (1,596.8 won) that the quarterly average has reached the 1,500-won range. It is also higher than the first quarter of 2009 (1,418.3 won), when the exchange rate surged during the global financial crisis.

The main reason for the recent weakness of the Korean won has been identified as large-scale net selling of domestic stocks by foreign investors. As of June 26, foreigners have recorded a net sell-off of 136.7841 trillion won worth of stocks in the Korea Exchange securities market this year. In June alone, net sales amounted to 37 trillion won. The outflow of foreign capital is attributed to profit-taking following a sharp rise in domestic stock prices and portfolio rebalancing. Experts believe this trend could continue for some time.

Some analyses suggest that foreign investors still have a net selling capacity of between 100 trillion and 150 trillion won. The foreign ownership ratio in the Korea Exchange securities market increased by 5.14 percentage points, from 36.28% at the end of last year to 41.42% as of June 26. This result occurred despite continued selling by foreigners, as the prices of large-cap stocks held by foreign investors rose.

The strengthening of the US dollar due to diminished expectations of a US base rate cut is also increasing downward pressure on the Korean won. The dollar index, which measures the value of the dollar against the currencies of six major countries, surged to 101.798 on June 24 during intraday trading. This is the highest level in 13 months, since May 12 last year (101.974). The weakness of the Japanese yen is also affecting the won, as the Korean currency tends to move in tandem with the yen. The JPY-USD exchange rate climbed to 161.93 yen on June 25, marking the highest in one year and eleven months.

Some observers believe that the listing of SK hynix’s American Depositary Receipts (ADR) on the Nasdaq, scheduled for July 10 and valued at 30 billion dollars, could help alleviate the depreciation pressure on the Korean won. The expectation is that SK hynix will bring the dollars raised in the US into Korea, improving supply and demand conditions. However, most experts agree that unless the flow of foreign capital reverses, it will be difficult for the exchange rate to shift to a downward trend in the near term.

Jeon Kyuyoun, an economist at Hana Securities, commented, “In the short term, the exchange rate is likely to remain on an upward trajectory reflecting the strong US dollar,” adding, “Supply-side factors that could drive the exchange rate down are limited due to the continued net selling of domestic stocks by foreigners.” However, he also noted that since the current exchange rate is now close to the peak levels seen during the financial crisis (1,597 won), market perceptions of a peak are likely to increase around the 1,560-won range.

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