Dollar index hits 13-month high, won-dollar rate threatens 1,550 line

By Kim Byeo-ri, The Herald Business

The won-dollar exchange rate is surging as a stronger dollar — driven by expectations of a US interest rate hike — combines with large-scale net selling of Korean equities by foreign investors. The opening rate crossed 1,540 won for the first time in 13 trading sessions Thursday.

The won-dollar rate opened at 1,543 won in the Seoul foreign exchange market Thursday, up 1.2 won from the previous session. The opening rate had last topped 1,540 won on June 8, when it stood at 1,555.2 won. The opening rate has exceeded 1,500 won for 18 consecutive trading sessions since June 1.

The rate closed the daytime session Wednesday at 1,541.8 won, the highest closing level in roughly 17 years — since March 9, 2009, during the global financial crisis, when it reached 1,549 won. In the subsequent after-hours session, the rate rose a further 3.6 won to close at 1,542.7 won. That was the highest after-hours close in 13 trading sessions, since June 5, when it stood at 1,559 won.

Analysts say the won is being pulled lower by a sharp rise in the dollar's value on the back of US rate hike expectations, compounded by continued net selling of Korean stocks by foreign investors.

"Global dollar strength and real demand for dollars are limiting any decline in the exchange rate," said Min Gyeong-won, an economist at Woori Bank. "If market expectations for a Federal Reserve rate hike this year are priced in, appetite for risk assets could shrink. Recent portfolio rebalancing-related selling of domestic equities is also feeding into offshore custody buying, which could push the rate higher."

The dollar has strengthened steadily since the Federal Open Market Committee signaled at its June 18 meeting that further rate hikes remain possible, citing persistent inflationary pressure. The median projection for the benchmark interest rate at year-end, as shown in the FOMC's dot plot, came in at 3.8 percent — a level widely interpreted as pointing to at least one more hike this year.

The CME Group's FedWatch tool showed an 84.1 percent probability of at least one rate increase by year-end, up 10.3 percentage points from a month earlier, when the figure stood at 73.8 percent.

The dollar index, which measures the greenback against a basket of six major currencies, closed Wednesday at 101.61, up 0.2 points — its highest level since May 12 last year, when it reached 101.79. After trading in the mid-to-upper 90s for much of the past year, the index crossed 100 on June 17 and has risen consistently since.

Large-scale net selling of Korean equities by foreign investors rebalancing their portfolios is also pushing the rate higher. Net selling means investors sold more shares than they bought. According to Korea Exchange, foreign investors recorded net selling in 13 of the 17 trading sessions through Wednesday.

After a period of net purchases starting June 12, foreign investors resumed heavy net selling from Friday, offloading more than 4 trillion won ($2.6 billion) on Wednesday alone. Their cumulative net selling through Wednesday reached 29.7 trillion won. As of 9:10 a.m. Thursday, foreign investors had already net sold 877.7 billion won in shares.

Jang Jeong-su, deputy governor of the Bank of Korea, said at a financial stability report briefing Wednesday that foreign investors' need to rebalance may have grown as stock prices swung sharply before surging recently, but added that "it is difficult to judge when the selling will end."