The won-dollar exchange rate has rapidly fallen to the 1400 won level, raising questions about whether the won will continue to strengthen. While the influx of dollars due to corporate tax payments could lead to further declines, experts predict a rebound if the supply of dollars is exhausted.
According to the Seoul foreign exchange market on August 9, the exchange rate closed at 1409.5 won per dollar on the morning of August 8. During the day, it hit a low of 1407.3 won, marking the lowest level since October 2, 2022, when it was 1399.5 won.
The exchange rate has seen a significant drop recently. After peaking at 1555.8 won on July 2, it has decreased by 139.7 won over 25 trading days, averaging a decline of 5.6 won per day. This rate of decline is more than double the average drop of 2.5 won per day recorded from April 9 to June 30, 2022.
Factors contributing to the recent sharp decline in the exchange rate include improved dollar supply and coordinated market interventions by the U.S. and Japan. The influx of dollars related to SK Hynix's American Depositary Receipts (ADRs) and dollar sales by exporters have also alleviated supply pressures.
Additionally, the completion of profit-taking and portfolio rebalancing by foreign investors in the domestic stock market has influenced the drop in the exchange rate. After recording the largest net sell-off in history in June due to profit-taking and rebalancing, foreign investors shifted to net buying in July.
Unusual market cooperation between the U.S. and Japan has also been cited as a factor in the exchange rate decline. On July 31, the two countries' foreign exchange authorities jointly purchased yen to counter the yen's depreciation, marking the first such intervention since the Asian financial crisis in 1998. As a result, the yen-dollar exchange rate, which was nearing 164 yen, temporarily fell to the 155 yen range before rising to the 157 yen level as of August 8. The won also strengthened in line with the yen's appreciation.
The dollar's recent weakness has further supported the decline in the exchange rate. Following the release of U.S. employment data on August 7, which fell significantly short of expectations, the Federal Reserve's outlook for interest rate hikes this year weakened. The dollar index, which measures the dollar's value against six major currencies, has dropped to 99.60.
In this context, attention is focused on whether the won's strengthening trend will continue. With corporate tax prepayments scheduled for December, there are expectations that this will reduce downward pressure on the exchange rate. This year, particularly strong earnings from semiconductor companies like Samsung Electronics and SK Hynix are expected to lead to a significant increase in corporate tax prepayment amounts.
Lee Jin-kyung, a researcher at Shinhan Investment Corp., stated, "As companies prepare for the corporate tax prepayment schedule at the end of August, the influx of foreign exchange will support downward pressure on the won-dollar rate. However, while the won may strengthen in line with the yen, monitoring for further interventions is necessary."
Some analysts caution against viewing the recent won strength as a structural trend. Hanwha Investment & Securities noted that the limited supply factors from ADR conversions and exporter negotiations mean that once these supplies are exhausted, dollar availability will inevitably decrease. They also pointed out that while U.S.-Japan policy cooperation can control the speed of exchange rate increases and speculative positions, it cannot change the underlying fundamentals.
Choi Kyu-ho, a researcher at Hanwha Investment & Securities, remarked, "The U.S.'s active currency intervention policy creates asymmetrical movements in the exchange rate rather than simply lowering it. In the short term, the likelihood of a rebound in the exchange rate is high as the dollar supply that led to the sharp drop in July weakens."
* This article has been translated by AI.
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