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The won-dollar exchange rate plunged more than 30 won in a single day to the 1,520-won range, driven partly by yen weakness. Some analysts attribute the move to forward-selling by SK hynix, which is issuing American depositary receipts (ADRs).
In the Seoul foreign exchange market on the 3rd, the won-dollar rate ended afternoon trading at 1,525.6 won, down 30.2 won from the previous day's daytime closing price (based on 3:30 p.m.). The daytime close was the lowest since the 17th of last month (1,513.4 won). The decline was the largest in three months, since April 8 this year (-33.6 won).
Weak U.S. employment data dampened expectations of a U.S. rate hike, while intervention by Japanese foreign exchange authorities strengthened the yen, contributing to the exchange rate's fall (won's appreciation). Korean foreign exchange authorities are also believed to have released intervention volumes late in the session.
The market also points to forward-selling stemming from SK hynix as a cause of the exchange rate's decline. On the 15th, the day after the scheduled payment date for its ADR issuance, SK hynix plans to bring about $29 billion (approximately 45 trillion won) into Korea and convert a substantial portion into won. However, if the exchange rate falls further before the 15th, there is a risk that the amount received upon conversion to won would decrease. To avoid this, there is an incentive to carry out forward-selling in installments—selling dollars to be received later at a predetermined rate. Forward-selling exerts downward pressure on the won-dollar rate in the spot market.
Meanwhile, Korea's foreign exchange reserves as of May this year ($427 billion) ranked 13th, down one notch from the previous month. After maintaining 9th place worldwide from September to December last year, Korea fell to 10th in January this year and to 12th in February—dropping out of the top 10 for the first time since 2000—before falling to 13th in May as it ceded its position to Singapore. This is attributed to the use of dollar holdings to defend the exchange rate.
With Korea's ranking slipping in this way, discussions over its appropriate level of foreign exchange reserves are expected to continue. The Bank of Korea maintains that reserves in the low $400 billion range are not insufficient given the size of the economy, but other countries are increasing their reserves. According to a recent survey by the Korean Economic Association, 33.3% of respondents said reserves should be around "$450 billion to $600 billion"—higher than current levels.
