If the scale of overseas investment increases by 3% from the recent 20-year average for a month, the won-dollar exchange rate rises by 0.7 percentage points, according to a Bank of Korea study released on the 18th. The analysis supports the view that expanded investment in U.S. stocks is one of the reasons pushing the exchange rate higher. When investors exchange won for dollars to buy U.S. stocks, the exchange rate can climb. As of Nov. last year, Korea's holdings of U.S. stocks and bonds totaled $871.8 billion (about 1.273 trillion won).
According to the report "The impact of overseas investment and investment income on the exchange rate," which Director Shin Sang-ho of the Bank of Korea's Capital Flows Analysis Team released, the exchange-rate-raising effect from expanded overseas investment persisted for three years. The increase was especially large in the first six months after investment amounts rose.
If the size of reinvesting earnings from overseas investment rises by 1 percentage point above the average, the exchange rate increases by 0.4 percentage points. This effect disappeared only after 18 months.
If earnings from overseas investment increase by 8% from the 20-year average, the exchange rate is observed to fall by 0.4 percentage points. When dollars are exchanged into won, dollars are supplied to the market and the exchange rate falls. The downward effect on the exchange rate disappeared after one year.
Director Shin projected that even if investment income expands going forward, the exchange rate may not fall. That is because the tendency to keep holding dollars or reinvest them even when making money from overseas investment is strengthening. This is a phenomenon seen in Japan, and Korea shows the same pattern. Like Japan, Korea's overseas investment returns have surpassed domestic investment since the mid-2000s, and since 2014, net worth (net external financial assets), which subtracts liability from asset, has turned to a surplus.
Director Shin suggested refining the monitoring framework by determining how much investment income flows into and out of the domestic foreign exchange market. Director Shin said, "The impact on the foreign exchange market varies depending on dividends, reinvested revenue, and hedging," adding, "We need to examine not only the scale of investment income but also whether it is repatriated and the propensity to retain it."