The won-dollar exchange rate fell below 1,400 won for the first time since Sept. 29 last year. iM Securities said the drop is due to a seller's market in dollars and noted that the supply advantage is likely to continue in the second half, leaving room for a decline to as low as 1,350 won.
Park Sang-hyun, an iM Securities researcher, said in a report on the 20th that "despite the surge in U.S. and Japan Government Bonds yields, the biggest reason the downward trend in the dollar-won rate remains intact is dollar supply and demand," adding, "the dollar supply advantage is likely to continue for the time being."
First, it expects larger conversion volumes from Samsung Electronics and SK hynix. Park said, "As both companies are expected to announce large-scale shareholder return policies, they are likely to convert foreign currency holdings," adding that scheduled interim corporate tax prepayments through the end of Aug. and efforts to raise investment funds related to the three mega projects being promoted by the government are also expected to increase conversion volumes.
It also said the sharp increase in Korea's trade surplus is favorable for dollar supply and demand. This year's trade surplus from January to July was $167.8 billion, and it sees a high possibility that the annual trade surplus will exceed $360 billion. That is four times the record annual trade surplus of $95.2 billion in 2017.
In addition, as foreign investors' heavy net selling of domestic stocks in the first half eased, it said the pressure on dollar demand has decreased.
Park projected the won-dollar rate will fall to the 1,350-won level. Park said, "With the dollar supply advantage likely to continue for the time being, we expect further declines in the won-dollar rate," adding, "If the U.S. and Japan continue policies to induce a stronger yen to stabilize the Government Bonds markets, the dollar-won rate could fall further."
It also said continued won strength could ease pressure to raise the base rate. Given that the Bank of Korea's monetary policy committee has cited inflation risks and the exchange rate as key issues in setting the base rate, a sharp drop in the exchange rate could ease pressure for additional hikes.
It also sees a positive impact on foreign investment in domestic stocks and bonds. A surging exchange rate has reduced the appeal of domestic stocks, posing risks to the stock and bond markets. Won strength could encourage increased foreign investment in the stock and bond markets through the end of the year.
However, the drop in the won-dollar rate also carries negatives, as it can expand overseas investments by domestic investors and lead to declines in sales and profits for domestic exporting corporations.