Exchange Rate Surge... Has the Foreigners' Buy-Korea Effect Worn Off?

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The won-dollar exchange rate, which had sharply risen at the beginning of the year, is showing signs of stabilization thanks to net purchases of domestic stocks by foreign investors. However, there are still factors supporting a strong dollar, such as the retreat of expectations for an early interest rate cut in the U.S. and geopolitical risks in the Middle East, leading to forecasts of increased volatility.

On the 5th, in the Seoul foreign exchange market, the won-dollar exchange rate opened at 1,337.0 won, up 14.4 won from the previous trading day. As of 10:02 a.m., it was trading at 1,338.6 won.

The won-dollar exchange rate stabilized after reaching a two-and-a-half-month high of 1,344.2 won on the 17th of last month. Despite ongoing dollar-strengthening factors such as the retreat of expectations for an early U.S. base interest rate cut and heightened geopolitical risks in the Middle East, the exchange rate's stability is analyzed to be influenced by a large inflow of foreign capital into the domestic stock market.

On the 2nd, foreign investors made a net purchase of 1.8946 trillion won worth of stocks in the KOSPI market, the largest ever. The previous record for the largest net foreign purchase was about 2.3 trillion won on the 11th of last month, but that was an exceptional case due to a large block deal outside regular trading hours by the Samsung Electronics family, making the actual net foreign purchase at that time effectively the largest ever.

The government's announcement to raise the value of undervalued domestic companies through a corporate value-up program is interpreted as a factor sustaining foreign investors' buying of Korean stocks. Since foreign investors convert dollars into won to purchase Korean stocks, their net buying is considered a major factor in lowering the won-dollar exchange rate. On the 2nd, the won-dollar exchange rate fell by 9.2 won compared to the previous trading day, marking the largest drop since December 14 of last year.

Park Sang-hyun, a researcher at Hi Investment & Securities, explained, "The surge in foreign investors' net stock purchases driven by expectations for the government's corporate value-up program led to won appreciation," adding, "Whether the foreign investors' buy-Korea phenomenon continues will determine the exchange rate trend for the time being."

Although the exchange rate showed a downward trend due to foreign investors' buy-Korea activity, there are many factors supporting a strong dollar, so volatility is expected to increase for the time being. In particular, the delay in the expected timing of the Federal Reserve's interest rate cut due to strong U.S. employment and economic conditions is a major factor strengthening the dollar.

According to the U.S. Department of Labor, nonfarm payrolls in the U.S. increased by 353,000 last month, far exceeding the forecast of 185,000. The January unemployment rate was 3.7%, lower than the market expectation of 3.8%. Due to the stronger-than-expected labor market, expectations for the Fed's rate cut timing have been pushed back. The sharp rise in the won-dollar exchange rate at the start of trading on this day is also interpreted as a result of this.

Geopolitical risks in the Middle East are also factors strengthening the dollar. The U.S. has launched large-scale retaliatory airstrikes in response to attacks on U.S. military bases stationed in Jordan by pro-Iran militias. Jake Sullivan, U.S. National Security Advisor, stated on the 4th (local time) that retaliatory attacks will continue. Amid concerns over Middle East conflicts, the dollar index, which measures the value of the dollar against six major currencies, continues to rise.

However, there are also expectations that the rise in the won-dollar exchange rate may be limited due to export growth and economic recovery expectations driven by the semiconductor industry's recovery. Heo Moon-jong, head of the Woori Financial Management Research Institute, said, "Reflecting the retreat of early rate cut expectations by the U.S. Federal Reserve and geopolitical risks in the Middle East, the possibility of won depreciation is dominant," but added, "Supported by the domestic export recovery following the semiconductor industry's rebound, the extent of depreciation will be limited."

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