Foreign Rebalancing Slows, Sending Won to 1,460s Against Dollar

Stronger-than-expected second-quarter growth also pushes the exchange rate lower

"Downtrend likely to continue despite war and other risks"

The won-dollar exchange rate, which had surged into the 1,550s, fell to the 1,460s for the first time in two and a half months. The move was driven by a slowdown in foreign investors' rebalancing of domestic stock holdings and by second-quarter economic growth that far exceeded expectations. Funds raised through SK Hynix Inc.'s American depositary receipts and steady dollar sales from exporters also supported the won.

At 3:30 p.m. in Seoul's foreign-exchange market on July 23, the won traded at 1,466.80 per dollar, down 13.3 won, or 0.78%, from the previous day. The exchange rate, based on the market average rate, entered the 1,460s for the first time since May 7, when it stood at 1,454 won per dollar. After climbing to 1,555.8 won per dollar on July 2, it fell below 1,500 on July 14, closing at 1,493 won per dollar, and has dropped 26.7 won over six trading sessions.

The won's sharp rebound came as foreign net selling, cited as a main driver of the currency's surge since May, began to ease. Foreign investors were net buyers of 2.2846 trillion won ($1.65 billion) in South Korean stocks on July 23. Over the past four trading sessions, they bought a net 5.4734 trillion won ($3.96 billion). Bank of Korea Governor Rhee Chang-yong told a full session of the National Assembly's Strategy and Finance Committee on July 9 that foreign investors' cuts to their weighting in South Korean equities would likely ease in the second half.

Second-quarter gross domestic product, which beat expectations by a wide margin, also helped push the exchange rate lower. Real GDP rose 0.6% in the quarter, according to data released on July 23, triple the Bank of Korea's May forecast of 0.2%. Kwon Young-sun, head of the Woori Finance Research Institute, said the growth surprise strengthened the case for an additional Bank of Korea rate increase, fueling expectations that the interest-rate gap between South Korea and the US will narrow further. He said the won-dollar rate is likely to remain on a downward trend despite short-term variables such as the war in the Middle East.

Jung Young-hyo, Korea Economic Daily reporter, hugh@hankyung.com