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South Korean won hits highest point in more than one year

The won-to-dollar exchange rate dropped below 1,100 for the first time in fourteen months on Aug. 10.

The slide appears to be the result of the US dollar losing strength amid growing market perceptions that Washington will delay further interest rate hikes in the wake of Brexit, the United Kingdom’s vote to leave the European Union, along with waves of foreign equity investment capital flowing into the South Korean stock market.

The Foreign Exchange Market in Seoul finished trading on Aug. 10 with an exchange rate of 1,095.4 won to the dollar, down 10.7 won from the day before. The rate started the day at 1,102.45 won - a drop of 3.65 from the day before - but fell below the 1,100-won mark around 10:06 am as the slide intensified during trading. It was the first time the closing price fell below 1,100 won since June 22 of last year, when it finished at 1098.8 won to the dollar.

Analysts attributed the drop to the dollar’s weakness being exacerbated by the biggest decline in non-farm productivity in three years, with its second-quarter level calculated the day before as down 0.5% from the previous quarter and 0.4% from the same period in 2015. The rate accelerated beyond expectations as it fell below the anticipated baseline of 1,100 won, leading to sales at a loss and market expectations of a further drop.

The won-to-dollar exchange rate briefly spiked after the Brexit decision in late June before resuming its decline amid a strengthening won, with the dollar’s strength wilting amid expectations that the political and economic uncertainties triggered by the Brexit would lead the US to put off further interest rate hikes. Money has already been flowing into emerging markets, with growing anticipation of increased liquidity as countries actively use monetary and fiscal policy to gird for the Brexit’s effects. Considered an emerging economy stock market - and further shored up by its companies’ second quarter performance - South Korea’s stock market has been on the receiving end of large amounts of foreign capital.

The KOSPI index has been repeatedly setting new records for the year as a result. In just over a month between July and Aug. 10, foreign buyers made around 5.1 trillion won (US$4.6 billion) in net purchases on the KOSPI market. Increased domestic equity investment by foreign buyers raises demand for the won, which contributes to its strength.

Foreign equity investment funds could start slipping away as foreign exchange profits materialize around the 1,100 won range. But more foreign capital appears likely to come in after the decision by Standard and Poor‘s - the world’s third-ranked credit rating company - to upgrade South Korea‘s sovereign credit rating to “AA” on Aug. 8. The KOSPI set a new record for the year on Aug. 10 when it finished at 2,044.64, up 0.86 (0.04%) from the day before. Foreign buyers made around 276.8 billion won (US$252.3 million) in net stock purchases on the KOSPI market during the day.

Experts predicted that while the won-to-dollar exchange rate could fall further as the KOSPI index rises, it is likely to bottom out in the 1,080-1,100 won range.

“Not only has there been an ongoing global liquidity rally, but the exchange rate could drop further if there’s a unanimous decision to freeze the interest rate at the regular meeting of the Bank of Korea’s Monetary Policy Committee on Aug. 11,” said NH Futures researcher Min Gyeong-won.

“But if there are improvements in US retail sales indicators - which are set to be announced shortly - the exchange rate decline could be blunted due to expectations of improvement in the US economy,” Min added. “Also, we can expect authorities to intervene in the market to hold up the bottom if the exchange rate drops sharply.”

Another focus of attention is the impact on the domestic exporters that are likely to suffer from a strong won. Analysts said the potential blow to the domestic economy as a whole is difficult to anticipate at its current level.

“Last year, the average exchange rate was around 1,130 won to the dollar, and this year’s average has been around 1,170, so the current exchange rate trend isn’t likely to be enough to change the overall direction,” said Korea Development Institute researcher Jung Kyu-chul.

“It’s difficult to diagnose the economic effects from the exchange rate decline in any one direction because it also results in a reduced price burden from the standpoint of domestic consumers and importers,” Jung noted.

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