Since July began, the KOSPI index has fallen more than 30%, and the won's exchange rate against the U.S. dollar has also dropped more than 6%. Stocks and the exchange rate had moved in opposite directions until now, but a different pattern has emerged recently.
It is being analyzed that the main factor is sales of dollars held by export corporations. As the won's value had fallen excessively, they appear to have moved to exchange currencies on expectations it would return to the usual level. In addition, expectations that the Bank of Korea (BOK) will soon raise interest rates again are affecting the "stock-exchange rate coupling (synchronization)."
◇ Corporations releasing dollars… "expectations for the exchange rate to stabilize lower"
Originally, when the domestic stock market fell, the exchange rate tended to rise. This is because foreigners sell domestic stocks and increase transactions of converting won into dollars. As such transactions increased, a trend also emerged in which corporations and individuals sold won they held on expectations that the won's value would fall.
However, since the start of this month, stocks and the exchange rate have been falling together. This is analyzed as the impact of increased dollar supply in the domestic foreign exchange market. The biggest factor is dollar selling by export corporations. On the 10th, SK hynix sequentially converted into won the $26.5 billion (about 40 trillion won) it raised through an American depository receipts (ADR) listing, strengthening expectations that the dollar's value would fall.
An official at the foreign exchange authorities said, "Until the second quarter, the government had to ask corporations to sell dollars they held to stabilize the exchange rate lower, but since the start of this month, they are selling on their own."
Also, the net selling of domestic stocks by foreigners has decreased. According to the Korea Exchange (KRX), since the start of this month, foreigners have recorded net selling of domestic stocks totaling 1.74 trillion won. Foreigners are still leading the market's decline, but it has decreased significantly compared with the first half's monthly average net selling of 2.4 trillion won.
◇ Possibility of additional BOK rate hikes... decoupling of the won and yen
Analysts say the won's strength against the yen is related to the possibility of an additional base rate hike by the Bank of Korea. As the won strengthened and the yen weakened at the same time recently, the won-yen exchange rate fell into the 800-won range.
The BOK raised the base rate this month from 2.5% to 2.75% and left the door open to an additional hike. Governor Shin Hyun-song of the BOK said at a briefing to the National Assembly's Strategy and Finance Committee on the 29th, "I think the most reasonable approach is to keep the rate-hike stance to rein in core inflation."
If the BOK raises rates further, the Korea-U.S. rate gap (1 percentage point) will narrow. If so, the flow of investors moving to the United States in pursuit of higher rates could ease. In contrast, after Japan raised rates last month to 1%—the highest in 31 years—prevailing views are that it will not rush additional hikes to stay aligned with the government's fiscal expansion stance.