The foreign currency market is experiencing a paradox where there is an abundance of dollars, yet they are difficult to obtain in the forex market. This discrepancy is attributed to export companies holding onto dollars in foreign currency deposits instead of converting them to won, which is limiting the supply of dollars in the spot exchange market. Experts suggest that expectations of high exchange rates are encouraging companies to retain their dollar holdings.
According to the Bank of Korea on July 14, corporate dollar deposits increased from $81.93 billion in January to $80.04 billion in April and $82.99 billion in May, after a decline to $72.71 billion in March. In contrast, personal dollar deposits decreased from $14.4 billion to $12.57 billion during the same period.
The contrasting trends in dollar holdings between corporations and individuals indicate that the increase in foreign currency deposits is primarily driven by businesses. In March, corporate dollar deposits temporarily fell due to payments in won to domestic suppliers and corporate tax obligations, but they quickly rebounded, surpassing early-year levels by May. This suggests a strengthened inclination among companies to hold dollars this year.
Analysis indicates that export companies are opting to keep dollars in foreign currency deposits rather than converting them to won, resulting in a reduced supply of dollars in the spot exchange market. This phenomenon is evident in the differing conditions of the foreign currency funding market and the forex market. While transactions involving borrowing dollars against won collateral are active in the foreign currency funding market, leading to favorable dollar procurement conditions, the forex market continues to face a shortage of dollars, keeping the won-dollar exchange rate elevated. Last month, the rate approached 1,560 won, and it has remained in the high 1,490s this month.
Moon Da-woon, a researcher at Korea Investment & Securities, stated, "The premium reflected when borrowing dollars in the foreign currency funding market has dropped to historical lows, even turning negative. While dollars are not scarce in the foreign currency funding market, there is a shortage in the forex market, causing exchange rates to surge."
Experts analyze that expectations of continued high exchange rates are further increasing corporate dollar holdings. As foreign investment funds experience net outflows due to profit-taking from rising stock prices and rebalancing, the supply-demand dynamics are leading to a dollar shortage. Companies anticipating rising exchange rates are delaying dollar sales, which is intensifying actual upward pressure on exchange rates. This cycle is exacerbated by a trend of reducing currency hedging and increasing dollar holdings, further decreasing the influx of dollars into the forex market.
Looking ahead, there are indications that factors prompting companies to sell dollars may increase in the second half of the year, potentially allowing some liquidity to flow into the spot exchange market. Factors such as large-scale forward sales by Hanwha Ocean, inflows from SK Hynix American Depositary Receipts (ADRs), increased dollar inflows due to strong semiconductor exports, and demand for currency exchange for corporate tax prepayments are all cited as potential contributors to increased dollar supply. In fact, the recent drop in the exchange rate to the high 1,490s has been attributed to the effects of SK Hynix ADR conversion volumes.
Moon added, "The government's foreign exchange supply and demand measures are gradually working to alleviate the supply-demand imbalance. Accordingly, adjustments in supply and demand are expected to emerge, leading to a gradual decline in expectations regarding exchange rates."
* This article has been translated by AI.
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