On the 12th, foreign investors were net sellers (sales minus purchases) of 351.2 billion won in the KOSPI market. The exchange rate finished the week at 1,468.4 won, up 10.8 won (0.7%) from the previous day. Analysts said a main reason for the rise was foreign investors converting the won they received from selling Korean stocks into dollars. The same pattern of a rising exchange rate alongside foreign net selling occurred on the 13th.
By the same logic, foreign net buying (purchases minus sales) should lead to a lower exchange rate, but that has not been the case. On the 7th, foreign investors were net buyers of 1.2548 trillion won in the KOSPI market, yet the exchange rate closed at 1,445.8 won, up 0.3 won (0.02%) from the previous day.
In the market, people are saying things like, "Foreign investors' trading of Korean stocks only works to push the exchange rate higher," and, "When it comes to the rising exchange rate, isn't it unfair to blame only Korean retail investors trading U.S. stocks for their overseas investments?"
◇ With the weak won, foreign currency hedging has recently increased… even when they buy stocks, dollars don't flow out
According to the Korea Exchange (KRX), from the 2nd to the 12th this year, foreigners were net buyers of 1.3772 trillion won in the domestic stock market. During the same period, the won-dollar exchange rate rose 29.4 won (2%) from 1,439 won to 1,468.4 won. In theory, when foreigners buy Korean stocks, they sell dollars and buy won in the foreign exchange market, which should push the exchange rate down, but in reality it went up.
The reason foreign net buying does not lead to a lower exchange rate is seen as the fact that they are not sourcing dollars directly in the foreign exchange market. In the past, foreign investors invested in domestic stocks without currency hedging to seek both capital gains from rising share prices and currency gains from a stronger won. But as the uptrend in the exchange rate persisted from late 2024, that strategy wobbled. Even if stock prices rise, if the exchange rate climbs more, the currency loss from conversion can offset a substantial portion of the stock investment revenue.
In response, foreign investors have recently been using foreign exchange swaps, which exchange currency at a preset rate at a specific future time, to reduce currency volatility risk. Even if a foreign investor converts dollars into won when buying domestic stocks, when they later sell the stocks, they receive dollars back at the preset rate, offsetting supply and demand for dollars in the market. As foreigners conduct transactions this way, net buying has not produced a drop in the exchange rate.
According to the Bank of Korea, foreign exchange swap transactions conducted by foreign exchange banks with nonresidents rose 22.2%, from a daily average of $9.1 billion in the fourth quarter of 2024 to $11.12 billion in the third quarter last year.
◇ When repatriating unhedged stock investments, the exchange rate is affected
A different explanation is needed for why the exchange rate rises when foreigners are net sellers of Korean stocks.
Experts point to two causes. Foreign investment that flowed in without currency hedging in the past still affects the exchange rate. In particular, if investors who once sold dollars directly in the foreign exchange market to buy domestic stocks, but could not withdraw funds while the KOSPI moved sideways, now sell domestic stocks amid the recent upturn, the exchange rate rises. In fact, the share of foreign currency hedging in the past is known to have been less than 10%.
Another cause is the expansion of overseas investment by domestic investors. Even if foreigners invest in the domestic market with currency hedging, a rise in domestic investors buying overseas stocks can influence the exchange rate. According to the Korea Securities Depository (KSD) Securities Information Portal (SEIBro), domestic investors were net buyers of stocks for six consecutive trading days from the 3rd (+$458.62 million) to the 12th (+$425.23 million).
Jo Yong-gu, a researcher at Shinyoung Securities, said, "Both individuals and corporations are increasing overseas investment, which means more dollars are needed, but even foreign investors, who had been supplying dollars, are no longer putting dollars into the market, creating a shortage and pushing the exchange rate higher," adding, "The uptrend in the exchange rate looks likely to continue for quite some time."