As expectations grow that Korea's economy will expand more than expected this year, the won is weakening against the U.S. dollar, the Chinese yuan, and the Japanese yen.
Analysts say foreign selling of Korean stocks is overwhelming the increase in semiconductor exports. With the Middle East war dragging on and amid a semiconductor supercycle, foreigners are moving to realize stock gains. In addition, Korea's foreign exchange market is more open than China's or Taiwan's, leading to an assessment that authorities' intervention is less effective.
◇ Since the Middle East crisis, the won has depreciated against the dollar, yuan, and yen
On the 4th, the won-dollar exchange rate opened at 1,530 won, up 13.6 won from the previous day. After closing in the 1,500-won range for 12 consecutive trading days from the 15th of last month, it broke through 1,500 won intraday that day. It surpassed the record of 11 consecutive trading days in the 1,500-won range from Feb. 24 to March 10, 2009, during the global financial crisis.
The rise in the won-dollar exchange rate picked up after the Middle East war. The rate climbed 5.3% from the mid-1,400-won level just before the war to the 1,500-won level recently (based on the weekly transaction closing price on the 2nd). During this period, the won also weakened against the Chinese yuan and the Japanese yen. According to the Bank of Korea, the won-yuan rate rose 6.9%, and the won-yen rate increased 2.8%.
After the Middle East war, demand grew for U.S. dollar-denominated assets, which are classified as safe assets, pushing down the value of major Asian currencies such as the won and the yen. Since 2019, when the United States became a net energy exporter, the dollar has tended to strengthen when international oil prices rise. Korea and Japan are net energy importers and highly dependent on the Middle East, taking a bigger hit. The yen-dollar rate rose 2.4% after the Middle East war.
Korea and Japan also share a recent trend of large net selling of stocks by foreigners. From January to May this year, foreigners were net sellers of more than 100 trillion won in the Korean stock market. Over the same period, foreigners were also net sellers of more than 1.7 trillion yen (about 16.2 trillion won) in the Japanese stock market.
However, some analysts say the larger net selling in Korea than in Japan is because foreign investment in Korea is concentrated in Samsung Electronics and SK hynix. From foreign investors' perspective, there are no other stocks that sufficiently diversify the risks of Samsung Electronics and SK hynix.
◇ Yuan at a 4-year record high... Korea's open market blunts impact of authorities' intervention
By contrast, the Chinese yuan has strengthened recently as it is seen as relatively insulated from the fallout of the Middle East war. The CFETS RMB Index, a basket index that shows the yuan's real value against 24 currencies including the dollar, yen, and won, was 101.41 on the 2nd, the highest in four years since September 2022.
China also has the characteristic of the government actively managing the exchange rate. Regarding the won steadily exceeding the 1,500-won level despite recent verbal intervention by Korea's foreign exchange authorities, an official in the FX market said, "Compared with China and Taiwan, Korea's FX market can be seen as more open, which becomes a factor that reduces the effectiveness of authorities' intervention."
The official said, "Taiwan, which adopts a managed floating exchange rate system, differs from Korea in the intensity of intervention and control, with the government requiring corporations and investors to provide proof of real FX demand."