South Korean Won Weakens Past 1,500 Against Dollar for First Time Since 1998 Crisis

The South Korean won has breached the 1,500 won per U.S. dollar mark on average for the second quarter, a threshold not seen since the height of the 1997 Asian financial crisis. This significant depreciation marks a 28-year high for the quarterly average, surpassing even the levels seen during the 2009 global financial crisis.

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The average exchange rate for the second quarter is expected to exceed 1,500 won, which is the first time since the first quarter of 1998, during the foreign exchange crisis.

The primary driver behind the won's sharp decline is the substantial net selling of South Korean stocks by foreign investors. Year-to-date, foreigners have offloaded over 136 trillion won (approximately $98 billion) in equities. This trend, particularly pronounced in June with nearly 37 trillion won in net sales, is largely seen as portfolio rebalancing by investors cashing in on rising stock prices.

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The main reason for the weakening of the won is the large-scale net sales of domestic stocks by foreign investors.

Despite the significant stock sales, foreign investors' share in the stock market has actually increased, reflecting the sharp rise in the prices of large-cap stocks they hold. Analysts at Hana Securities forecast that the U.S. dollar's strength, driven by the Federal Reserve's hawkish stance and a robust U.S. economy, will likely sustain the won's weakness. They predict the annual average exchange rate could exceed 1,500 won.

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The hawkish stance of U.S. Federal Reserve officials and the strong U.S. economy are expected to lead to a stronger U.S. dollar for the time being, and the exchange rate is likely to rise for the time being.

While South Korea boasts a strong current account surplus, largely due to robust semiconductor exports, the weakening won is attributed to increased private overseas investment. Unlike in the past, when current account surpluses often translated into central bank reserves, financial reforms have encouraged private entities to expand their foreign asset holdings. Potential large-scale investments in the U.S. by South Korean companies further add to concerns about foreign exchange market stability. The situation is compounded by geopolitical tensions, such as renewed U.S.-Iran conflicts, which can further destabilize currency markets.

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Private overseas asset accumulation through direct investment is larger than the surplus in the current account.