These days in the foreign exchange market, people say that "the old exchange-rate formulas are not working." That is because the phenomena of "strong dollar = weak won" and "won–yen coupling" have faded. Instead, we are seeing the dollar and the won strengthen together, and the won's strength coexist with yen weakness.
Experts say the dollars sold by Korea's corporations, along with the U.S. benchmark interest rate and Japan's national liability, will continue to be the three main variables driving exchange-rate swings going forward.
◇ SK hynix ADR $26.5 billion hits the market, exchange rate 1,550 won → 1,370 won
An unusual pattern in which the won has strengthened alongside a stronger dollar has been driven by domestic corporations selling dollars. SK hynix began sequentially selling the $26.5 billion it raised through its American depository receipts (ADR) listing starting on Jul. 15. Around the same time, other corporations also sold dollars they held. As the amount of dollars released into the foreign exchange market grew, the won strengthened.
In fact, the won–dollar rate stayed above 1,500 won for 49 consecutive trading days from May 19 to Jul. 14. On Jul. 2 it rose to 1,554.4 won, reaching a level similar to 2009 during the global financial crisis. But on Jul. 15, when SK hynix began selling dollars, it was in the 1,490-won range. It kept widening its decline thereafter and ended weekly transactions that day at 1,370.4 won.
There is a view that the future won–dollar rate will depend on how long corporations' dollar selling continues. The ADR effect of SK hynix is said to effectively end by Sep. If corporate exports worsen and there are not enough dollars to sell, or if the preference to hold dollars grows stronger, the won–dollar rate could turn upward.
Conversely, some analysts say corporations will keep selling dollars. To carry out SK hynix's 40 trillion won share buyback and cancellation and Samsung Electronics' 90 trillion to 110 trillion won shareholder returns plan, they will have to sell dollars they hold. Kwon A-min, an NH Investment & Securities researcher, said, "If you assume the shareholder return funds for the two companies are fully exchanged, the impact would be similar to SK hynix's ADR."
◇ If the U.S. raises rates, the rate gap will widen again
There is also a view that the won–dollar rate will shift with U.S. monetary policy. When the United States raises rates, the dollar tends to strengthen and Asian currencies like the won tend to weaken. With inflation rising due to the Middle East war that began in Mar., the United States is considering a rate hike.
If the United States raises rates, the "Korea–U.S. interest rate gap," one cause of a high exchange rate, will widen again. That means the won–dollar rate could resume an upward trend. As the Bank of Korea raised rates in both Jul. and Aug., the gap between the two countries' rates narrowed from 1.25 percentage points to 0.75 percentage point.
The possibility that the United States will raise its benchmark rate within the year cannot be ruled out. According to the Chicago Mercantile Exchange (CME) FedWatch, as of the 31st of last month, the probability that the Federal Reserve will raise the benchmark rate in Sep. was 62.4%, up from 41.4% a week earlier.
◇ Japan's massive national liability accelerates yen weakness
Unlike the won, the yen has not broken out of weakness. The yen–dollar rate stood at 159.97 yen that day. Last month, the United States and Japan coordinated to pull the rate from 160 yen to 150 yen, but it is reverting.
The yen's weakness is attributed to Japan's massive fiscal deficit. With the fundamentals of the Japanese economy deteriorated, the yen is weakening. Japan's national liability reached a record 1,346.68 trillion yen as of the end of Jun. As the Japanese government sticks to expansionary fiscal policy, local reports say there will be fiscal deficits of hundreds of trillions of won next year.
Korea, by contrast, is posting a high growth rate on the back of strong semiconductor exports. That means increased inflows of foreign capital investing domestically could push the won even stronger. Min Kyung-won, a Woori Bank researcher, said, "The recovery in exports, the main fundamental for the won, is solid," adding, "Not only are semiconductor prices rising, but sales volumes are also increasing, which raises the likelihood of foreign investment funds returning as we head toward year-end."