Against the U.S. dollar, the won-dollar exchange rate started at 1,529 won on the 5th and surged to 1,549.1 won as of 10:27 a.m. It is the first time the intraday rate has risen this high since March 10, 2009 (1,561 won), during the global financial crisis.
The rise in the won-dollar exchange rate is seen as stemming from net selling of domestic stocks by foreign investors. When foreigners sell domestic stocks and convert the proceeds into dollars, dollar demand expands and the won-dollar exchange rate rises. According to the Korea Exchange (KRX), as of 9:57 a.m. that day, foreigners were net sellers of 1.9646 trillion won.
Foreign investors posted net sales of 6.5 trillion won on the 2nd and a further 6.9 trillion won the previous day. Although the scale of foreign net selling shrank from 43 trillion won in March to 5 trillion won in April, it widened again to about 44 trillion won in May.
Foreigners' net selling of domestic stocks is analyzed as portfolio rebalancing rather than profit-taking. As the KOSPI jumped and the share of Korea in portfolios increased, they are turning to net selling to cut the weight. Min Kyung-won of Woori Bank said, "Because the selling is largely for rebalancing, it is causing a continued rise in the exchange rate," adding, "If the symbolic level of 1,530 won is breached, speculative buying will join in and create a weak-won mood."
The won-dollar exchange rate closed at 1,529.7 won in weekly transactions the previous day. It then rose to as high as 1,540.59 won in after-hours trading.
Verbal intervention by the foreign exchange authorities is also showing little effect. Deputy Prime Minister and Minister Koo Yun-cheol said the previous day that "we will take necessary measures immediately against excessive one-sidedness," but the won-dollar exchange rate ended weekly transactions 0.3 won below the opening price. Koo also said that day, "Volatility in the financial and foreign exchange markets has recently been increasing," adding, "We are responding with particular vigilance."
From the 15th through the previous day, the won-dollar exchange rate has stayed above 1,500 won for 13 consecutive trading days on a closing basis.
☞ Rebalancing
Rebalancing means the process by which an investor brings a portfolio that has deviated from preset asset and country allocation targets back to those targets. For example, if Korean stock prices jump and Korea's weight in the portfolio rises above the target, the investor sells some to lower the weight. If the proceeds from selling won-denominated stocks are converted into dollars in this process, it becomes a factor pushing up the won-dollar exchange rate.