The strong dollar is expected to ease in the future, and there is no credit risk in Korea.
Foreigners are merely realizing profits from the rapidly rising Korean and Japanese stock markets.
High exchange rate contributes to strengthening Korea’s fundamentals, including exports
The won-dollar exchange rate rose to the 1,460 won range during night trading on the 7th. This is the first time the exchange rate has been in the 1,460 won range since April and September. As the exchange rate soared, the KOSPI index adjusted significantly and government bond interest rates soared, the so-called ‘triple weakness’ phenomenon became prominent, and fear of exchange rates hit the domestic financial market.
On the 10th, iM Securities asked, ‘Is the rising exchange rate really bad news?’ The report analyzed that “a rise in the exchange rate is not a major negative factor that will have a fatal blow to the domestic financial market, especially the stock market, but rather can act as a positive factor.”
Increased liquidity due to interest rate cuts by the U.S. Federal Reserve → Dollar strength likely to ease
One of the important factors behind the dollar’s strength is the short-term money market crunch in the United States. The dollar’s strength was triggered by a sharp decline in fiscal spending due to the longer-than-expected federal government shutdown and a lack of dollar liquidity due to increased financing by hyperscalers (large cloud companies). however
It is highly likely that the federal government shutdown, which triggered a short-term funding crunch, will be resolved before Thanksgiving on the 27th. Therefore, the fund crunch phenomenon is expected to gradually ease.
In addition, the U.S. Federal Reserve’s (Fed) policy to expand liquidity, including the December interest rate cut, is expected to exert downward pressure on the dollar. Park Sang-hyun, an analyst at iM Securities, said, “The slowing growth rate in the fourth quarter due to the prolonged federal government shutdown, as well as the fund crunch, support that the U.S. Federal Reserve’s cycle of additional interest rate cuts will not end in December. New York Federal Reserve President John Williams said that it may soon be necessary to expand the balance sheet through bond purchases in response to the need for liquidity. This suggests that the U.S. Federal Reserve may take steps to expand liquidity again to alleviate the crunch in the short-term money market.”
The biggest reason to worry about the surge in the domestic won-dollar exchange rate was the risk of fund outflow due to internal and external credit risks. Analyst Park analyzed, “Although there is some short-term money market tightness in the U.S., it is not at a level to cause concern about external credit risk,” adding, “As for domestic credit risk, no special risk signals are detected when looking at the trends of various domestic credit indicators.” Domestic credit spreads are stabilizing downward, and the absolute level of the domestic CDS premium is also low.
So, what is the reason for foreigners leaving the Korean stock market? Analyst Park explained, “This can be explained by some profit taking in major asset markets where dollar liquidity has surged due to the short-term money market crunch in the U.S.” He added, “Korea and Japan, which have risen the most among major countries’ stock prices since early October, have become major profit-taking targets, and as a result, the won and yen have recorded the largest weakening since early October compared to other countries.” The sharp rise in domestic government bond interest rates also appears to have put a burden on the exchange rate. The Bank of Korea’s strengthening of interest rate freezes led to foreigners making profits in the bond market, putting upward pressure on the exchange rate.
A high exchange rate may have a positive effect on the Korean economy and financial market.
The current exchange rate level in the 1,400 won range should not be evaluated using the same standards as the past. This is not because of the credit or debt crisis in Korea or the global economy, but because the situation in G2 created a strong dollar. The United States’ national priority, strengthening leadership in the digital economy and artificial intelligence (AI), and China’s deflation risk have made the dollar trend stronger.
Although the U.S. Federal Reserve has entered an interest rate reduction cycle, the fact that the U.S. base interest rate level is high compared to major countries also supports this logic. The high interest rates in the United States simply mean that the U.S. economy is more robust than other countries. Korea is no exception. The U.S. base interest rate is higher than Korea’s and even the growth rate is higher in the U.S. In terms of economic fundamentals, a strong dollar and a weak won have become the so-called ‘new normal’.
Another factor contributing to the new normal of a weak won is the expansion of domestic funds’ overseas investment. The rapid expansion of overseas investment by pension funds as well as domestic individual investors after the pandemic is also causing a structural weakening of the won in terms of supply and demand. The United States has become a black hole for global funds, sucking up liquidity from around the world.
The current high exchange rate can actually contribute to the recovery of domestic economic fundamentals, including the export economy. Oil prices are fluctuating around $60, and the price of semiconductors, a major export item, is showing an unprecedented surge. In addition, a weak won can lead to pressure to improve terms of trade, that is, to strengthen the export competitiveness of domestic companies.
Analyst Park said, “Although a rise in the exchange rate may lead to an increase in import costs, the fall in oil prices will offset the increase in costs due to the rise in the exchange rate, while the rise in the exchange rate will lead to a surge in semiconductor prices and increased margins for companies.” He added, “The Korean economy and stock market cannot achieve a similar effect to Japan’s ‘super yen’, but unlike before, an internal and external environment is being created in which the weakening won will have a positive impact on the domestic economy and stock market.”
As a result, if some foreign investors’ profits are completed and the fund crunch in the United States is alleviated, it is highly likely that foreign funds will flow back into the domestic stock market. In addition, the weakening value of the won will lead to strengthening the competitiveness of Korean companies’ exports, which will play a role in cushioning some of the shock of the United States’ high tariffs, which is expected to have a positive impact on domestic export companies.
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