The Korean won has posted the largest appreciation among major currencies since July, driven by rising dollar supply amid strong semiconductor exports and by companies selling dollars as demand for won-denominated funds grew from corporate taxes and domestic investment. Expectations of a further rate increase by the Bank of Korea have added support to the currency's strength.
The won closed at 1,382.4 against the dollar in Seoul on the 24th, down 4.1 won from the previous session. During the day it fell as low as 1,376.50, setting a new low for the year. That was the lowest intraday level in about 11 months, since a low of 1,375.70 on September 17 last year. The won had set fresh intraday lows for four consecutive sessions since the 19th.
The scale of the won's gain stands out clearly against other major currencies. According to Bank of Korea data, the won appreciated 11.90% against the dollar from July 1 to August 21, ranking first among the currencies surveyed. The Norwegian krone came second with a 6.03% gain, while the British pound rose 2.87%, the euro 2.32% and the Japanese yen 2.31%. The won's appreciation was more than five times that of the yen. Analysts say this is a won-specific strength that is difficult to explain by broad dollar weakness alone.
Behind this are a current-account surplus driven by strong semiconductor exports and corporate dollar selling. The current-account surplus reached $191 billion in the first half, while spot and forward dollar sales by non-financial private companies rose 71.5% from a year earlier to $263.59 billion in the second quarter. Demand for won grew from corporate taxes, dividends and domestic investment, while the incentive to hold dollars weakened as the exchange rate fell.
"Recently the won-dollar rate is driven more by supply and demand than by the direction of the dollar," said Wi Jae-hyun, an analyst at Kyobo Securities. "It reflects a flow in which dollars earned through trade surpluses are actually entering the country."
Monetary policy is also lending strength to the won. After the Bank of Korea raised its base rate to 2.75% from 2.50% last month, 13 of 20 experts (65%) surveyed by Seoul Economic Daily projected a further 0.25 percentage point increase at the Monetary Policy Board meeting on the 27th. Seven (35%) expected the rate to be held. This means a "back-to-back hike" — raising rates in August after July — is the prevailing forecast.
Lee Nam-kang, an economist at Korea Investment Holdings, said the growth momentum from the semiconductor boom and the Bank of Korea's tightening stance are likely to continue, and projected that the won-dollar rate could fall to the low-to-mid 1,300 range by year-end. Still, with quarterly dividends concentrated this month, dollar demand could flow in from foreign investors remitting dividends abroad, and bargain-hunting after a sharp drop in the exchange rate could also limit further declines.
"It remains to be seen whether corporate dollar selling goes beyond a temporary event and becomes a structural trend," said one foreign-exchange market expert. "Whether the selling continues past the fall will be the turning point for the won's strength."
