Improved dollar supply fuels won's strongest monthly gain since 2009

Exchange rates for major currencies are displayed at a currency exchange counter at Incheon International Airport, Sunday. Yonhap

The Korean won posted its strongest monthly gain against the U.S. dollar last month since March 2009, fueling optimism that the currency could strengthen below 1,400 won per dollar. This marks a sharp reversal from just weeks earlier when markets were bracing for the currency to weaken toward the 1,600 won-per-dollar level.

Analysts said Sunday that the rebound was fueled by an improving dollar supply, as SK hynix converted part of the proceeds from its American depositary receipt (ADR) Nasdaq offering into won, while exporters stepped up dollar sales.

In the Seoul foreign exchange market, the won ended onshore trading at 1,424.0 per dollar on Friday, the last trading day of July.

The currency strengthened by 125.4 won against the dollar in July, an improvement from its June 30 close of 1,549.4 won, gaining 8.81 percent against the dollar. This marks its strongest monthly performance since March 2009, when the won strengthened by 150.5 won against the dollar during heightened volatility from the global financial crisis.

The won weakened to as low as 1,559.2 per dollar on July 1, briefly approaching the 1,560 level before reversing course just two trading days later.

The exchange rate rose on only five trading days in July, while the pace of the won’s appreciation accelerated toward the end of the month. In particular, it gained 42.6 won against the dollar over the final five trading days, marking its biggest weekly advance since it gained 100.8 won during the week of Nov. 7-11, 2022.

Market watchers said the rebound was largely driven by dollar supply improvement. Strong semiconductor exports prompted major exporters to step up dollar sales by converting overseas earnings into won.

SK Group Chairman Chey Tae-won, front row center, joins SK hynix officials at the chipmaker’s opening bell ceremony at the Nasdaq MarketSite in New York City on July 10 (local time), marking the listing of its American depositary receipts on the Nasdaq. Reuters-Yonhap

SK hynix's ADR issuance provided another boost.

The company raised about 40 trillion won ($26.5 billion) from its ADR offering in July and vowed to use part of the proceeds for domestic investment.

The chipmaker is believed to have converted part of the proceeds into won after bringing the funds back to Korea, adding to dollar liquidity in the domestic foreign exchange market.

Additionally, pressure from foreign investors’ portfolio rebalancing has eased, reducing foreign selling of Korean equities, which had been cited as one of the factors behind the won’s weakness.

In July, foreign investors sold a net 17.1 trillion won worth of KOSPI shares, down sharply from net sales of 44.5 trillion won in May and 48.4 trillion won in June.

Monetary policy also lent support to the won.

The Bank of Korea raised its benchmark interest rate by 25 basis points to 2.75 percent at its July 16 policy meeting, with markets eyeing another rate hike as early as this month. The narrowing interest rate gap with the United States has eased concerns over capital outflows and improved sentiment toward the Korean currency.

Analysts said the won could strengthen further in the coming months if conditions remain favorable, particularly an improving dollar supply.

Moon Da-woon, an analyst at Korea Investment & Securities, said exporter demand for won ahead of interim corporate tax payments this month coupled with expectations for a weaker U.S. dollar is likely to continue supporting the Korean currency.

"The lower end of the won-dollar exchange rate is likely to move lower through August," Moon said. "Although our fair-value range for the second half of the year is 1,410 to 1,560 won per dollar, there is a possibility the rate could enter the 1,300 won range."

Some analysts, however, cautioned that the won's strength may prove temporary, as expectations for further U.S. interest rate hikes and a rebound in overseas equity investment by Korean retail investors could revive demand for dollars.