[100-Year Life Finance] KOSPI Rise Signifies Won Currency Value Increase

Published 10 Jul.2024 17:13(KST)

Generally, when the KOSPI rises, the value of the Korean won also increases. This is because both variables have reflected the state of our economy. When our economy recovers, the KOSPI and the value of the won rise together. However, this year, while the KOSPI has risen, the value of the won has fallen. The value of the won is expected to rise soon.

Up to July 5 this year, the KOSPI rose by 7.8%. This was because foreigners net purchased about 24 trillion won worth of our stocks amid the export-driven recovery of our economy. However, the value of the won fell by 7.2% during the same period. From January to May this year, the current account surplus reached $25.5 billion (compared to $2.3 billion during the same period last year), indicating an inflow of dollars. Despite this, the won’s value declined, which can be attributed to overseas factors.

Using a Vector Autoregression (VAR) model with statistics from January 2009 to December 2023, the determinants of the won-dollar exchange rate were examined. The variables used were the US Dollar Index, the yuan-dollar exchange rate, the Korea-US real interest rate differential, the current account balance, and the won-dollar exchange rate. When analyzing the factors explaining the won-dollar exchange rate fluctuations six months ahead (variance decomposition), the won-dollar exchange rate itself explains 51.9%. This means the exchange rate tends to move in one direction for a considerable period.

The next most influential factor affecting won-dollar exchange rate fluctuations is the US Dollar Index (explaining 34.8% over six months). Since our exchange rate is quoted in dollars, when the dollar value rises (falls), the won value falls (rises). Other factors influencing the won-dollar exchange rate, in order, are the yuan-dollar exchange rate (8.4%), the current account balance (3.4%), and the Korea-US real interest rate differential (1.5%).

This year, the rise in the dollar’s value has contributed most significantly to the decline in the won’s value. Up to July 5, the dollar index against advanced country currencies rose by 3.5%, and against emerging market currencies by 4.2%. The won’s value fell even more because the Japanese yen, which competes with some export products, depreciated by as much as 14.0%.

In the second half of the year, the probability of the dollar’s value falling is high as US economic growth slows. Recent economic indicators show concrete signs of this slowdown. First, consumer sentiment is weakening. The Conference Board’s Consumer Confidence Index peaked at 110.9 in January and fell to 100.4 in June. Despite US major stock indices reaching all-time highs, consumer sentiment is weakening due to low household savings rates and a decline in real income for the median household.

Corporate sentiment is also weakening. The Institute for Supply Management (ISM) Purchasing Managers’ Index (PMI) is declining. The manufacturing PMI has been below 50 from November 2022 through June this year, indicating a recessionary phase in manufacturing. In June, the non-manufacturing PMI fell to 48.8, below 50, marking the lowest level since November 2022. This means that the service sector, which drives US economic growth, is contracting.

The weekly initial jobless claims, which provide the fastest gauge of the economy, are also trending upward. The 4-week moving average of claims rose from 200,000 in January to 240,000 in July. This is because employment growth is slowing and the unemployment rate is rising. The unemployment rate increased from a low of 3.4% in April last year to 4.1% in April this year.

When the unemployment rate rises, US consumer sentiment weakens, and not only market interest rates and stock prices but also the dollar index decline. An analysis of data from January 2000 to June 2024 shows a negative correlation coefficient of -0.53 between the unemployment rate and the dollar index, with the unemployment rate leading by four months.

The dollar index is expected to decline soon, leading to a rise in the won’s value. As the won appreciates, foreigners will buy more of our stocks, which will further increase both the won’s value and stock prices.