The won-dollar exchange rate has shifted from being heavily influenced by short-term supply and demand conditions to reflecting the fundamentals of the South Korean economy. Improved foreign investment in domestic stocks and increased dollar sales by export companies have contributed to a more stable foreign exchange market. These fundamental factors, including strong export performance and a current account surplus, are supporting the won's appreciation, raising the possibility of further declines in the exchange rate.
On August 24, the exchange rate in the Seoul foreign exchange market reached 1,376.50 won against the U.S. dollar, a decrease of 10.0 won from the previous closing rate of 1,386.5 won on August 21. This marks the lowest level since the intraday low of 1,375.70 won on September 17 of last year. Just two months ago, the rate had soared to over 1,560 won per dollar.
This year, the rise in the exchange rate has been driven more by short-term supply and demand factors than by fundamentals. Increased demand for dollars due to foreign net selling of domestic stocks has put pressure on the won, leading to its depreciation. In June, foreign net outflows from domestic stocks reached a record high of $32.37 billion.
Recently, however, supply conditions have improved rapidly. Export companies have significantly increased their dollar sales. According to data submitted by the Bank of Korea to lawmaker Kim Nam-jun, the total amount of spot and forward dollar sales by non-financial private companies in the second quarter of this year was $263.59 billion, a 71.5% increase compared to the same period last year. The net selling amount, after subtracting purchases, was $109.65 billion, nearly quadrupling from a year ago. The net selling for the first half of the year also reached $186.9 billion, more than three times higher than the same period last year.
Foreign capital flows are also supporting the won's strength. Recent foreign net buying of domestic stocks, along with solid export performance from August 1 to 20, has contributed to the appreciation of the won. Analysts suggest that strong exports and a current account surplus are increasing upward pressure on the won, supporting the decline in the exchange rate. Yoo Sang-dae, former deputy governor of the Bank of Korea, noted, "From late last year to early this year, short-term factors such as supply and demand and expectations had a greater impact on exchange rate determination than fundamentals, leading to a significant rise in the exchange rate. However, recently, the influence of supply and demand factors has diminished, while the impact of medium- to long-term factors such as interest rate differentials and current account surpluses is becoming more pronounced."
In the short term, the exchange rate may fluctuate around the 1,400 won mark rather than continuing a one-sided decline. Below 1,400 won, demand for payments from importers and currency conversion needs from foreign investors may limit the pace of decline. External factors such as U.S. monetary policy, global dollar trends, and geopolitical risks could also increase exchange rate volatility.
Choi Kyu-ho, a researcher at Hanwha Investment & Securities, stated, "For the time being, the won-dollar exchange rate is expected to face limited upward pressure around the 1,400 won mark. In the short term, it is more likely to fluctuate within the range of 1,370 to 1,430 won rather than decline unilaterally."
* This article has been translated by AI.
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