Weakening Korean won feared to dampen foreign stock investment

Traders work at Hana Bank in Seoul, Thursday. Yonhap

The Korean won has been losing ground against the U.S. dollar, weakening to around 1,400 won per dollar for the first time in four months, triggering concerns over an undermined foreign investor sentiment — a key driver behind the country’s recent stock market rally.

The main bourse KOSPI continues to record all-time highs, underpinned by foreign investors buying semiconductor shares.

However, the sharp depreciation of the local currency could slow this, since a weaker won translates to a smaller return when won-denominated assets are cashed out in U.S. dollars.

Market watchers say the bullish KOSPI could face a correction, influenced by the risk-averse sentiment of foreign investors, who account for over 30 percent of stock holdings, the highest in more than a year.

The won closed at 1,403.8 in after-hours trading at 2 a.m. Thursday, 11.2 won weaker from the daytime closing price. This was the weakest since May 14, when the figure hit 1,404.5 won. This is the first time the won slid to more than 1,400 won per dollar since May 16.

The won closed at 1,400.6 won on Thursday afternoon, 3.1 won weaker from the previous session. The KOSPI ended at 3,471.11 points, down 0.03 percent from the previous session.

“A weaker won means smaller dollar returns for foreign investors,” Standard Chartered Korea strategist Hong Dong-hee said. “If the won continues to weaken, it could slow or reverse the foreign-led rally we’ve seen in recent months.”

The won’s recent decline reflects global macroeconomic developments, including a weaker euro.

Also at play, he added, is the strong U.S. dollar amid rising Treasury yields and a hawkish stance from U.S. Federal Reserve Chair Jerome Powell, who warned of “risks on both sides,” in reference to a balance between inflation and employment data.

“The value of the won will face continued downward pressure if the dollar extends its strength. However, the Korean currency could strengthen later this year, prompted by U.S. monetary easing and a subsequent boost in the Asia-Pacific market overall,” Hong said.

The KOSPI’s recent rally is fueled in large part by foreign buying of over 7 trillion won in September alone.

Foreign investors have remained net buyers since May, just before the inauguration of President Lee Jae Myung.

However, they offloaded 249.7 billion won on Wednesday, turning to net sellers in the KOSPI market for the first time in three sessions.

Some say the Korean currency could continue to tick down, trapped by a vicious cycle in which its value falls due to foreign selling, with the foreign investor sentiment being further dampened in turn.

“The KOSPI is breaking record highs as of late, but the returns converted to the dollar remain significantly weak,” an iM Securities report said.

According to the Korea Exchange, foreign investors held a total of over 1,019 trillion won in listed stocks here, accounting for 30.75 percent of the total market capitalization. This is an increase from last month’s 29.46 percent and the highest since September last year.