The long-standing formula of ‘falling exchange rate equals rising stock market’ is breaking down. On the 13th, the South Korean won maintained its strength even as the Kospi index weakened, dropping below the 2,600 line during the day. The afternoon won-dollar exchange rate was recorded at 1,345.1 won. Although it rose by 10 won compared to the previous day due to foreign selling, it remains at a low level relative to this year’s average. Just a day prior, the exchange rate plunged to the 1,333 won range, hitting a two-year low.
Traditionally, stock prices and the won-dollar exchange rate move in opposite directions. This is because foreign investors, who act as big players in the stock market, sell stocks, convert them to dollars, and remit them overseas, increasing the demand for the greenback and weakening the value of the won. However, this ‘inverse correlation’ has recently been shaking.
The primary reason is an imbalance in supply and demand within the foreign exchange market. Driven by a record semiconductor export boom, companies have been rushing to convert their earned dollars into won, leading to an unprecedented surge in dollar supply. A foreign exchange dealer at a commercial bank stated that dollar supplies continue to flow in through SK Hynix American Depositary Receipt (ADR) exchanges and exporter net selling. They added that unlike early this year, there is now a heavier backlog of pending sales as market participants rush to offload dollars out of fear of further exchange rate declines. Even if foreign investors sell domestic stocks and absorb dollars, the volume brought in and released by domestic enterprises overwhelms this demand.
Min Kyung-won, a researcher at Woori Bank, noted that even if semiconductor stock prices undergo a correction, dollar supplies based on real-sector exports will continue independently, increasing the likelihood that dollar liquidity will emerge whenever the exchange rate rises.
Interpretations also suggest that the strong won is actually prompting foreign investors to sell stocks. Park Sang-hyun, a researcher at iM Securities, pointed out that while the Kospi surged as the won weakened from the second half of last year through the first half of this year, the index plummeted after the won turned strong in June. He explained that this rapid appreciation of the won and the expansion of currency volatility are fueling foreign investors’ selling sentiment toward the domestic stock market. Even if stock prices remain sluggish, an appreciating won increases the dollar-denominated valuation of Korean stocks, stimulating the desire to realize exchange gains.
The ‘illusion of earnings slowdown’ for corporations caused by the strong won is also a negative factor for the stock market. When the won-dollar exchange rate falls, revenue calculated in won appears smaller than revenue calculated in dollars. A securities industry official explained that when third-quarter earnings forecasts were initially presented, an exchange rate of 1,440 won was applied; with the rate having dropped by more than 100 won, shareholder disappointment amplifies even with the same sales volume.
Ultimately, unpredictable exchange rate volatility sits behind the severed traditional connection between the stock market and the foreign exchange market. Analysts indicate that supply and demand equilibrium is collapsing as foreign investors sell Korean stocks before the won depreciates further, while domestic exporters exchange earned dollars into won in anticipation of additional rate drops.
Park Sang-hyun noted that looking at the yen-won exchange rate, the magnitude of the won’s strength is gradually approaching an excessive level. He added that while it is positive that the past excessive won-weakness phenomenon has largely been resolved, foreign investors’ aggressive net selling momentum in domestic stocks will only subside once currency volatility stabilizes.
However, experts forecast that future additional appreciation of the won will be limited. Ahn Ki-tae, a researcher at NH Investment & Securities, stated that while export booms are incentives for a strong won, dollar demand resulting from overseas investments—including foreign direct investment (FDI) including investments in the U.S., as well as the National Pension Service—will partially offset the dollar supply. He projected that the won-dollar exchange rate will continue to hover in the mid-to-high 1,300-won range.
