The won is weakening rapidly. The won-dollar exchange rate has already surpassed 1,500 won, a level seen as a psychological resistance line. Even accounting for geopolitical risks, the rate is considered high.
Experts advise watching the Middle East war situation, capital inflows from inclusion in the World Government Bond Index (WGBI), and foreign investors' dividend remittances in April as variables that will affect the exchange rate going forward.
On the 1st, the won-dollar exchange rate closed at 1,501.3 won in the Seoul foreign exchange market. The rate first broke through 1,500 won on the 18th of last month and has continued to rise. On the 31st of last month, it even surpassed 1,530 won for the first time since the global financial crisis.
The direct backdrop to the surge in the exchange rate is geopolitical risk in the Middle East. In the wake of the Iran war, a stronger preference for safe assets expanded demand for dollars, while the won weakened rapidly at the same time. Choi Ye-chan, a researcher at Sangsangin Investment & Securities, said, "In this war, the Strait of Hormuz has actually been blocked, dealing a major shock to the domestic foreign exchange market, which has a high dependence on Middle Eastern crude."
Foreign investors' portfolio adjustments following gains in the domestic stock market are also cited as a factor pushing the rate higher. Wi Jae-hyun, a researcher at Kyobo Securities, said, "Even considering geopolitical risk, the current level is an overshooting zone," adding, "Since the domestic stock market has shown the best performance among global markets since the start of the year, it is inevitably most affected by end-of-quarter portfolio rebalancing." Foreign investors were net sellers of about 36 trillion won in the domestic stock market in March.
In fact, compared with Taiwan and Japan, which have similar dependence on Middle Eastern energy, the won's weakness stood out. While the won weakened about 6.7% in March, the Taiwan dollar fell 2.7% and the yen 2.3%.
In particular, this rise in the exchange rate is explained as stemming not from an expansion of overseas investments by individual investors but from changes in foreign supply and demand. The researcher said, "The important point is that the supply-and-demand players in the foreign exchange market have changed," adding, "Demand for overseas investments by domestic investors, which led the rise in the exchange rate late last year, has currently slowed, so once foreigners' cyclical selling adjustments end, upward pressure on the rate may ease."
There is an additional supply-and-demand variable to watch this month. With Korea included in the WGBI, won-denominated funds have been flowing in since the 1st. The market expects about 4.7 trillion won of monthly inflows into the domestic bond market. In fact, after WGBI inclusion the previous day, the won-dollar rate fell by nearly 30 won.
Koo Yun-cheol, Deputy Prime Minister and Minister of Economy and Finance, emphasized in a broadcast interview on the 29th of last month that "if foreign dollar funds come in due to WGBI inclusion and buy a lot of Korean Government Bonds, there is an effect of stabilizing the exchange rate."
By contrast, foreign investors' dividend remittances back to their home countries are a factor that reduces demand for won. April is when settlement of account dividends by listed domestic companies are concentrated, generating demand from foreign investors to remit dividend payments to their home countries.
The researcher said, "KOSPI-listed companies' settlement of account dividends this year are about 40 trillion won, and considering foreigners' equity share of about 32%, about 12 trillion won of foreign dividends are expected in April," adding, "For the month of April, the scale of foreign dividend remittances may exceed WGBI inflows, creating strong downward pressure on the won-dollar rate for the time being."
Ultimately, the direction of the exchange rate appears likely to be determined by the Middle East war situation. Researcher Choi said, "The precondition for exchange rate stability is an easing of the Middle East war," adding, "Assuming an end to the war in April, we should allow for the possibility of a sharp reversal after forming a peak around 1,530 won, falling below 1,440 won."