[Practical Finance] Buy Dollars When Cheap? ... Did You Know There's a 1~1.5% Fee Deducted?

Won-Dollar Exchange Rate Drops to 1110 Won Range
Safety Asset Acquisition Sentiment Grows Amid Increasing Uncertainty

[Asia Economy Reporter Park Sun-mi] Go Yoo-jin, a 30-something office worker, decided to open a dollar deposit account as the exchange rate fell below 1,110 won per dollar, preparing to travel abroad once the COVID-19 situation eases. She thought it would be useful to save a little more while the rate was low, but after hearing that there could be additional fees except when directly depositing and withdrawing physical dollar bills, she found herself in a dilemma.

As the 'exchange rate tech' craze to buy dollars when cheap sweeps through, the balance of dollar deposits in banks is accumulating. However, withdrawing physical dollar bills incurs a fee of around 1%, and exchanging back to won may result in exchange losses due to future dollar depreciation, so caution is necessary.

Dollar Deposit Balance at Five Major Banks Hits $52.6 Billion

According to the financial industry on the 18th, the balance of dollar deposits at the five major commercial banks stood at $52.628 billion as of the end of October, reaching an all-time high. This is an increase of nearly $10 billion compared to $42.682 billion at the end of January this year.

[Image source=Yonhap News]

The dollar savings and time deposit products sold by commercial banks offer preferential interest rates of around 0.10% per annum when certain conditions are met, but reflecting the U.S.'s 'zero interest rate' environment, the actual rate is effectively around 0%. Despite the lack of interest income, the balance of dollar deposits in banks is growing to record levels, reflecting the psychology that buying dollars while they are cheap is beneficial. The dollar is a representative safe asset, and buying it when financial market uncertainty rises can serve as a risk hedge.

However, blindly subscribing to dollar products without a clear purpose amid the hype can lead to losses.

[Image source=Yonhap News]

Weak Dollar Expected to Persist Amid Stimulus Expectations

Dollar savings and time deposit products sold by banks are denominated in dollars, so customers aiming for exchange rate gains mostly convert won into dollars and deposit them. The won-dollar exchange rate, which surged to the 1,280 won range last March, has recently plunged below 1,110 won. Joining dollar savings and time deposit products now allows customers to accumulate more dollars for the same investment amount compared to the past.

However, the problem arises at withdrawal. If the customer did not deposit physical dollar bills but converted won to dollars electronically, a cash withdrawal fee of about 1-1.5% applies when withdrawing physical dollar bills later. This means that even if dollars were bought cheaply, the dollar value must rise by more than 1-1.5% at withdrawal to make a profit.

Even if the customer does not need physical dollar bills and exchanges back to won to recover the investment, a decline in the dollar's value afterward can cause exchange losses. The heads of the five major commercial banks predict that with Joe Biden's election in the recent U.S. presidential election, the won will appreciate and the dollar will weaken. The exchange rate is expected to maintain a downward trend to around 1,100 won within this year and could fall further to as low as 1,050 won next year. In the foreign exchange market, expectations for large-scale U.S. economic stimulus under the Biden administration are fueling a continued weak dollar trend. Recently, hopes for a COVID-19 vaccine have also contributed to the dollar's weakness. If the dollar continues to weaken, customers must be prepared for exchange losses when converting saved dollars back to won. Although dollar deposit accounts are protected up to 50 million won under depositor protection, losses due to exchange rate declines are not covered.

The banking industry expects that if the weak dollar trend continues, customers' desire to accumulate dollars while cheap will persist, leading to a flood of dollar savings and time deposit products and related promotions. The overseas stock investment craze, known as 'Seohak Ants,' is also driving dollar purchases. Accordingly, the balance of dollar deposits in banks may continue to break monthly records.

Hana Bank's 'One Dollar Foreign Currency Installment Savings,' which waives cash withdrawal fees after just one month of subscription, has gained explosive popularity. Since its launch in September, it surpassed 10,000 accounts and $1 million in deposits within about a month, and as of the 6th of this month, it recorded 24,492 accounts and $3.87 million in deposits. NH Nonghyup Bank launched the 'NH Main Transaction Preferential Foreign Currency Installment Savings,' which offers cross-preferential interest rates when subscribing to a won and foreign currency package product, and is applying up to 90% exchange rate preferential treatment on deposit and withdrawal transactions until the end of this month.

Shinhan Bank, in collaboration with Shinhan Card and Shinhan Financial Investment, allows customers to reinvest 'The More' Shinhan Card points monthly into Shinhan Bank dollar deposits or Shinhan Financial Investment's overseas investment accounts, enabling asset accumulation.

This content was produced with the assistance of AI translation services.