The won posted its fastest appreciation against the dollar since the global financial crisis last month, driven by a surge of dollar supply as SK Hynix's American depositary receipt proceeds and heavy export-sector dollar selling hit the market.
The easing of the dollar supply imbalance that had long weighed on the won, combined with the Bank of Korea's benchmark interest rate hike narrowing the Korea-US rate gap, has fueled speculation that the won-dollar rate could break below 1,400 won.
The won-dollar rate closed the daytime session at 1,424.0 won at 3:30 p.m. Friday, down 125.4 won from end-June (1,549.4 won), according to the Seoul foreign exchange market. That is the largest monthly decline since March 2009, when the rate fell 150.5 won amid extreme volatility during the global financial crisis.
The won's monthly appreciation against the dollar reached 8.81% in July, the highest since March 2009's 10.88%.
The rate surged as high as 1,559.2 won intraday on July 1, threatening the 1,560 level. Two days later, however, it dropped more than 30 won to the low 1,500s and reversed course entirely, falling consistently — save for five trading sessions — to settle in the 1,400s.
In the final week of last month, from July 27 through July 31, the rate dropped 42.6 won — the largest weekly decline in roughly three years and eight months, since the week of Nov. 7–11, 2022, when it fell 100.8 won.
On Thursday, the rate fell as low as 1,418.0 won intraday, its lowest level in nine months since Oct. 20 last year. The daytime close at 3:30 p.m. Friday was 1,424.0 won, though the rate gave back some of those gains in the overnight session to finish at 1,435.5 won.
Based on the New York market closing price at end-July, the won had strengthened 7.95% against the dollar from end-June, the largest gain among the 20 major currencies tracked, according to Yonhap Infomax.
The Japanese yen also surged in July, rising 3.15% against the dollar after speculation about possible market intervention by the Japanese and US governments emerged on Thursday. Even so, the yen's gain was less than half the won's. The Swedish krona (1.91%), British pound (1.63%), Australian dollar (1.45%), Canadian dollar (1.27%) and euro (0.94%) all posted smaller gains than the won.
A pullback in dollar demand from foreign investors rebalancing their equity portfolios also contributed to the won's advance. Late Thursday, the won-dollar rate fell sharply alongside the yen-dollar rate, dropping below 1,420 won. Foreign media and market participants pointed to the possibility of coordinated intervention by South Korean, US and Japanese currency authorities.
As the rate fell rapidly, demand from individual investors looking to buy dollars cheaply also jumped.
Individual customers at the five major commercial banks — KB Kookmin Bank, Shinhan Bank, Hana Bank, Woori Bank and NH NongHyup Bank — exchanged a combined $285 million worth of won into dollars last month, up about 74 percent from June's $164 million. It was the largest monthly total since January this year, when $506 million was exchanged amid brisk overseas stock investment by retail investors.
Dollar deposit balances at the five banks totaled $70.83 billion at end-July, up $5.79 billion from the previous month — the largest monthly increase since December last year, when balances rose $6.86 billion. In terms of outstanding balance, it was also the highest since end-December 2022 ($74.42 billion), a span of three years and seven months. The surge is widely attributed to investors treating the rate decline as a buying opportunity.
Market attention is now focused on whether the won-dollar rate will break below 1,400 won.
Lee Min-hyuk, an economist at KB Kookmin Bank, said the won had corrected from its undervaluation caused by the supply imbalance and had now reached what the bank estimates as its fair-value range of 1,410–1,420 won. "Given South Korea's sound economic fundamentals, a sustained downward trend in the exchange rate is possible," he said.
He added that the rate could fall below 1,400 won in the second half of the year, but cautioned that "near the 1,400 level, significant two-way volatility is likely as bargain-hunting dollar demand flows in."
Im Hwan-yeol, an economist at Woori Bank, said the won's downward trend would continue to be reinforced by the narrowing Korea-US rate differential following the Bank of Korea's rate hike. "We expect the second-half low to be around 1,380 won, but there is a possibility it could go even lower depending on future monetary policy in both countries and dollar supply-demand conditions," he said.
Some analysts see the rate rebounding, however, citing the possibility of further Federal Reserve rate hikes and a potential pickup in overseas investment by retail investors.
Kim Seo-jae, an economist at Shinhan Bank, said major initial public offerings are scheduled on US markets and the outlook for Fed rate hikes could regain momentum. "The rate could dip below 1,400 won in the third quarter before rebounding in the fourth quarter," he said.
attom@heraldcorp.com
