These days in the Korea market, the old rule that "if stocks rise, the exchange rate falls" is not working. On the 9th, the KOSPI closed at a record high of 4,586.32, up 0.75% from the previous day. The won-dollar exchange rate also closed at 1,457.6 won, up 7 won from the previous weekly trading close, rising for seven straight sessions.
This trend has continued since last year. In particular, foreigners' net buying in the stock market is increasing, which should push the exchange rate down, but dollar strength is holding. Experts point to expanded hedging by foreign investors, increased dollar holdings by corporations due to the U.S. reciprocal tariff and investment funds, and the spread of overseas stock investing by Korean retail investors trading U.S. stocks.
◇ Foreigners' net buying of Korea stocks has increased, but hedging keeps the exchange rate from falling
For foreigners to invest in Korea stocks, they have to sell dollars and buy won in the foreign exchange market. In this process, the increase in dollar supply lowers the exchange rate. At the same time, foreign funds enter the stock market and push stock prices up. In the Korea market, this rule—stocks up, exchange rate down—had operated this way.
But that rule is no longer working. Stocks and the exchange rate are rising together. From mid-June last year to January this year, the KOSPI surged 54%, setting a record high, while over the same period the won-dollar exchange rate rose 5.9% from 1,369 won to 1,450 won.
Over the same period, foreigners' net stock buying (purchases minus sales) generally increased, but it did not have the effect of lowering the exchange rate. Experts say this is "because foreigners are actively increasing hedging to avoid losses from exchange rate fluctuations."
Hedging is entering in advance into contracts with commercial banks to exchange currency at a set exchange rate at a specific time in the future. Even if a foreign investor converts dollars into won while buying domestic stocks, those dollars are taken by the counterparty bank, so they do not flow directly into the foreign exchange market. Later, when the investor sells the stocks after a certain period and converts back into dollars, the bank pays dollars under the contract, so there is little change in the exchange rate.
FX swap points, which indicate foreign investors' demand for hedging, have risen about 62% since the second half of last year. FX swap points represent the difference between the current exchange rate (spot) and the future exchange rate (forward). As foreign investors increase hedging by selling dollars now and buying dollars in the future, the forward rate rises (forward price falls), and FX swap points rise accordingly.
◇ U.S. reciprocal tariff and investment funds with the U.S., and expansion of overseas stock investing by Korean retail investors trading U.S. stocks also play a role
One of the main reasons the exchange rate keeps climbing is the expansion of our people's overseas stock investing. For our people to invest in overseas securities, they must put up won in the foreign exchange market and buy dollars, pushing the exchange rate up.
According to the Bank of Korea, since the second quarter of 2024, Koreans' investments in overseas securities (stocks and bonds) have exceeded foreigners' investments in Korea securities. In particular, in the third quarter of last year, Koreans' investments in overseas securities exceeded foreigners' investments in Korea securities by $74.4705 billion. Because the scale of Koreans buying dollars in the foreign exchange market is larger than the scale of foreigners supplying dollars, it acts as a factor pushing the exchange rate higher.
Behind the expansion of our people's overseas securities investing is the strength of the U.S. economy. The phenomenon of the U.S. annual growth rate exceeding Korea's has continued since 2023. In addition, the U.S. benchmark interest rate has been higher than Korea's since July 2022. Especially since last year, the United States has led the artificial intelligence (AI) boom, drawing in Korea's investment capital.
In addition, the U.S. reciprocal tariff policy and the conclusion of investment funds with the United States are also pushing the exchange rate up. Exporting corporations sought to expand local production facilities or increase investment in the United States to reduce the burden of reciprocal tariffs. In the process, they increased dollar deposits to secure dollars. Corporations' dollar deposits surged from $60.6 billion in May 2024 to $76.8 billion at the end of January last year, after Donald Trump was elected U.S. president. In August last year, they exceeded $79.0 billion, and in November last year, they remained above $75.0 billion.
Experts expect the situation of stocks and the exchange rate moving in the same direction to continue for the time being. Researcher Jo Yong-gu at Shinyoung Securities said, "It will be hard to fully return to the old pattern where stocks and the exchange rate move in opposite directions," adding, "If foreign investment increases with the inclusion of Korea bonds in the WGBI in April, the current excessive divergence could gradually narrow."