Does a falling exchange rate lift stock prices? Why the won-dollar rate matters for investors

The won-dollar exchange rate has fallen more than 170 won in less than two months. According to Seoul Money Brokerage Services, the average won-dollar rate climbed to 1,554.40 won on July 2 but dropped to 1,380.60 won on Tuesday — a decline of about 11.2 percent.

In the stock market, analysts frequently note that a falling exchange rate creates favorable conditions for foreign buying. Conversely, when the rate surges, concerns grow that an outflow of foreign capital could weigh on the market. So what is the connection between the exchange rate and foreign investment in stocks such as Samsung Electronics and SK hynix?

To start with the basics: the won-dollar exchange rate represents how many won are needed to buy one dollar. A rate of 1,500 won means it costs 1,500 won to purchase a single dollar.

This is where first-time investors often get confused. When the won-dollar rate falls, the value of the won actually rises. If it once cost 1,500 won to buy a dollar but now costs only 1,400 won, the won has strengthened against the dollar — a situation called "won strength." The reverse, when the rate rises and the won buys fewer dollars, is called "won weakness."

One reason the exchange rate matters so much in the domestic stock market is that it directly determines the actual return foreign investors earn. Domestic investors buy and sell shares in won, but foreign investors holding dollars face a different set of calculations.

Foreign investors must convert their dollars into won to buy Korean stocks, then convert won back into dollars when they exit their positions. Their returns therefore depend not only on share price movements but also on currency gains or losses from shifts in the exchange rate.

Consider this example: a foreign investor converts $1,000 into won at a rate of 1,500 won per dollar, investing 1.5 million won ($1,080) in Korean stocks. If the share price stays flat but the exchange rate falls to 1,350 won, converting that 1.5 million won back into dollars yields about $1,111. The investor made nothing on the stock itself, yet earned a currency gain of roughly 11.1 percent in dollar terms simply because the won strengthened.

The opposite holds as well. If the rate rises to 1,650 won, converting the same 1.5 million won back into dollars leaves the investor with only about $909 — a currency loss of roughly 9.1 percent in dollar terms, even though the share price did not move.

This is why foreign investors in the Korean market must pay close attention not only to corporate earnings and share price outlooks but also to the direction of the won. When won strength is expected, investors can anticipate currency gains on top of share price appreciation. When won weakness looms, even a rising share price may not be enough to offset currency losses and protect real returns.

The relationship between the exchange rate and foreign investor flows also works in the other direction. When foreign investors buy Korean stocks, they sell dollars and buy won, increasing demand for the won and putting downward pressure on the exchange rate. When they sell Korean stocks and convert the proceeds back into dollars to repatriate, the resulting demand for dollars can push the rate higher.

On Tuesday, foreign investors recorded net selling of about 3.82 trillion won on the Kospi. The won-dollar rate fell as low as 1,378.90 won during trading before reversing course, closing at 1,386.10 won as of 3:30 p.m. — up 3.70 won from the previous session.

Min Kyung-won, a researcher at Woori Bank, said the overnight decline on Wall Street, led by AI semiconductor stocks, added pressure on the domestic market. "Foreign net selling added further won-weakness pressure," he said.

That said, the exchange rate and foreign investor flows alone cannot simply predict the direction of share prices. On the same day, the Kospi closed up 45.78 points, or 0.68 percent, at 6,742.74 — even as foreign investors posted more than 3 trillion won in net selling. Share prices are influenced simultaneously by a wide range of variables, including institutional and retail trading, corporate earnings, and domestic and global economic conditions and interest rates.

Ultimately, it is more useful to understand the exchange rate and foreign investor flows as variables that influence each other, rather than to view the market through a single formula of "falling exchange rate → foreign buying → rising stock prices."

So why has the won-dollar rate dropped so quickly in recent months? Market analysts attribute it to a combination of increased dollar supply in the domestic market and shifting expectations around US monetary policy.

Kwon A-min, a researcher at NH Investment & Securities, identified rising dollar supply as the primary driver of the recent decline. The process began in July when SK hynix converted into won the dollars it raised through an American depositary receipt issuance in the United States. That was followed by a wave of dollar selling by major Korean companies around the corporate tax payment period in August, amplifying downward pressure on the rate. A reduction in uncertainty surrounding the Iran conflict and weaker-than-expected US employment data, which limited the scope for further dollar strength, also supported the won.

More recently, the forces driving the exchange rate have been shifting. Choi Gyu-ho, a researcher at Hanwha Investment & Securities, said the primary driver of the exchange rate has moved quickly from domestic dollar supply to Federal Reserve monetary policy expectations and global dollar flows. Weaker-than-expected US data on employment, inflation and now consumer spending have reduced the perceived need for additional Fed rate hikes, he said.

If upward pressure on US interest rates eases, the case for a stronger dollar weakens as well. Expectations of further rate hikes by the Bank of Japan, which have limited yen weakness, are also a supportive factor for the won. Hanwha Investment & Securities forecast that the won-dollar rate will for now fluctuate in a range of roughly 1,370 to 1,430 won, centered around 1,400 won, and gradually drift lower.

Investors should also be cautious about relying on old assumptions when reading the exchange rate. In the past, the formula of "current account surplus → won strength" worked fairly well: when Korean exporters brought home large amounts of dollars and converted them into won, domestic dollar supply rose and the won appreciated.

But the picture has changed. According to Shinhan Investment, South Korea's cumulative current account surplus for the first half of this year reached $191 billion — 1.5 times the full-year surplus recorded last year — yet the won-dollar rate briefly approached the 1,560-won level in June, its highest in 17 years since the global financial crisis. Trade and current account indicators pointed to won strength, but the actual exchange rate moved in the opposite direction.

The explanation lies in the expansion of overseas investment. Since the 2020s, individuals, corporations and institutional investors have sharply increased their allocations to foreign assets, meaning that dollars earned through exports are increasingly being channeled back into overseas investments rather than converted into won domestically as they once were. No matter how many dollars a country earns through its current account, if an equally large share flows back out through overseas investment, the won-strengthening effect is diminished.

The rapid growth of Korea's overseas asset holdings is also changing how the exchange rate moves. Shinhan Investment said that beyond how many dollars Korea earns through goods trade, the allocation and management of the country's already-accumulated overseas assets has become an increasingly significant influence on the won's value. Particularly given the high share of securities investment, the movement of capital between domestic and foreign stocks and bonds has grown in importance.

The old formula of "current account surplus → won strength" has thus given way to a more complex chain: current account surplus → increase in overseas investment → higher demand for dollars and less domestic currency conversion → upward pressure on the won-dollar rate.

Lee Jin-kyung, a researcher at Shinhan Investment, said the won is being reshaped by a new dynamic. "The won is now determined less by how much foreign currency Korea earns in the real economy, and more by where that foreign currency stays and how it gets converted," she said.

Ultimately, the won-dollar exchange rate is far more than a number telling travelers how much a dollar costs at the currency exchange counter. It shapes the returns foreign investors earn on Korean stocks, and the inflows and outflows of foreign capital in turn move the exchange rate itself. That is why share prices and the exchange rate cannot easily be viewed in isolation.