Jun Ji-hye, a reporter at the finance desk of The Korea Times, focuses primarily on economic policy and government agencies, mainly covering the Ministry of Finance and Economy, the Ministry of Budget and Planning, the National Tax Service and the Korea Customs Service. She previously covered financial authorities, including the Financial Services Commission and the Financial Supervisory Service, and earlier worked on the political, city and business desks, reporting on a wide range of issues.
Why won isn't recovering despite record exports
Exchange rates are displayed at a currency exchange booth in Myeong-dong, Seoul, Sunday. Yonhap
By Jun Ji-hye
Korean currency's structural shift to weaker levels began in 2024: analyst
The Korean won has continued to weaken despite record exports and a sustained bull run in the stock market, trading above the key psychological level of 1,500 won for nearly two months from mid-May through Tuesday.
On Wednesday, the won traded in the mid-1,510 range against the dollar before gaining ground late in the session to close onshore trading at 1,498.5 won, up 29.7 won from the previous close. It was the first close below the 1,500-won level in 37 trading days since May 14, when the currency ended at 1,491 won.
The country’s monthly exports topped $100 billion for the first time on record in June, according to data released by the Ministry of Trade, Industry and Resources, while the benchmark KOSPI has been riding a historic bull run, trading in the 8,000-9,000 range, helped by an artificial intelligence-driven rally in semiconductor stocks.
Conventionally, robust exports boost dollar inflows, a factor that would normally support the local currency. In addition, rising stock prices have traditionally been associated with foreign capital inflows, which in turn have supported the won. However, recent market trends have taken a different turn.
Data from the Bank of Korea showed that the won-dollar exchange rate in the second quarter breached the 1,500 won level at 1,501.6 won, marking its highest quarterly level since the first quarter of 1998, during the Asian financial crisis, when the rate averaged 1,596.88.
Significant downward pressure on the won has been attributed to a combination of factors, including foreign investors’ net selling of Korean shares, dollar strength, yen weakness and growing corporate demand for dollar holdings.
Government officials and analysts say stock market flows have been a key factor behind the won’s recent decline, with foreign selling of equities, along with demand to convert proceeds into dollars, emerging as major sources of pressure on the currency.
“The force of foreign investors’ net selling is outweighing other factors,” a finance ministry official said.
Amid the KOSPI’s historic surge this year, foreign investors have begun taking profits. While proceeds from stock sales are initially settled in won, converting them into dollars for repatriation increases dollar demand, pushing up the won-dollar exchange rate.
According to data from the Korea Exchange, foreign investors dumped a record 150.3 trillion won ($99.6 billion) worth of shares in the KOSPI market this year through July 3, marking the largest half-year outflow on record.
The relentless selling came in stark contrast to an unprecedented bull market, which saw the benchmark index surge 91.9 percent over the same period.
Heavy foreign selling has coincided with a broader global preference for the dollar, as fading expectations for rate cuts by the Federal Reserve and rising bets on future hikes have fueled demand for the safe-haven currency, putting further pressure on the won.
Amid continued dollar strength, the dollar index, which tracks the greenback against six major currencies, rose about 3 percent in the first half of the year, making the U.S. currency more expensive against the won.
“The dollar is extending its gains as markets price in a shift in the Fed’s monetary policy stance, making it difficult for the won-dollar exchange rate to decline anytime soon,” said Jeong Yong-taek, an analyst at IBK Securities. “The market is no longer being driven solely by equity flows, with interest rate differentials increasingly becoming a key factor.”
The yen’s slide to its weakest level in nearly 40 years has added to downward pressure on the won. In global foreign exchange markets, the won is widely seen as moving in tandem with the Japanese currency.
The yen has moved with high volatility in the lower-to-mid 160 range against the U.S. dollar, hovering at its weakest levels since December 1986, just after the historic Plaza Accord, when it traded between 158 and 163 yen.
Containers for export are stacked at Pyeongtaek Port in Gyeonggi Province, July 1. Yonhap
Another factor weighing on the won is exporters’ growing tendency to hold on to their dollar earnings rather than convert them into the local currency.
As expectations of further weakness in the local currency have strengthened, domestic companies have increasingly delayed exchanging export proceeds, keeping dollars out of the foreign exchange market.
Corporate dollar deposits at Korea’s four major banks — KB Kookmin, Shinhan, Hana and Woori — climbed to $48.3 billion as of July 2. The balance rose from $41 billion at the end of March to $43 billion in April, $44.9 billion in May and $46.9 billion in June, before increasing by another $1.4 billion in the first two days of July alone.
That buildup underscores how much of the country’s record June export receipts remained parked in bank accounts instead of flowing through the foreign exchange market, limiting dollar liquidity and depriving the won of a source of support.
Companies are delaying currency conversions, as expectations of further weakness in the local currency boost the appeal of dollar holdings. A persistent interest-rate gap between Korea and the U.S. has also made dollar deposits more attractive.
“Even at domestic banks, dollar deposit rates must track U.S. benchmarks to prevent arbitrage risks,” a local bank official said.
Many analysts expect the dollar to remain strong in the second half of the year, keeping pressure on the Korean won.
Nomura said on June 26 that the won could weaken to 1,600 per dollar as expectations for tighter U.S. monetary policy continue to support the dollar.
Kyobo Securities issued a similar forecast on July 2, saying the won could fall to 1,600 per dollar during the third quarter, citing continued selling of Korean stocks by foreign investors as they rebalance their portfolios.
Park Hae-sik, a senior research fellow at the Korea Institute of Finance, noted that the won-dollar exchange rate has undergone a structural shift to a higher trading range since March 2024 and is unlikely to return to its previous levels.
He said the exchange rate has generally remained between 1,400 won and 1,500 won per dollar since the second half of 2024, except for a brief period when it traded in the 1,300 won range.
“The higher average level of the won-dollar exchange rate appears to be linked to persistent dollar strength worldwide and increased overseas stock investment by Korean investors,” Park said. “Unless another major shock occurs, the exchange rate is unlikely to return to its previous range. Domestic financial institutions should closely monitor the effects of a prolonged period of high exchange rates on profitability and capital adequacy.”