Won Posts Biggest Gain Among Major Currencies Since Late June as Yen Sinks to 40-Year Low

Won Gains Even as Yen Slides in Clear Decoupling

$25.6 Billion From SK Hynix ADR Listing Enters FX Market

Foreign Investors Turn Net Buyers of South Korean Stocks

Exporters Also Rush to Sell Dollars

Japan Growth Weakness Fuels Fiscal Expansion Concerns

The South Korean won and Japanese yen, which had moved almost like twins for years, have recently diverged sharply. Despite external pressures including the war in the Middle East, high oil prices and a stronger dollar tied to the prospect of higher US interest rates, the won has posted the strongest gain among major currencies. The yen, by contrast, has continued to weaken. Shifts in supply and demand in South Korea’s foreign-exchange market, along with differences in the economic strength of the two countries, are driving the decoupling between the won and the yen.

Dollar Selling Pours Into South Korea’s Market

According to the foreign-exchange market on July 26, the won had risen 5.84% against the dollar from the end of June through July 24. That was the largest appreciation among major currencies. Over the same period, the euro slipped 0.11%, the Taiwan dollar fell 1.51% and the yen lost 0.93%.

The won and yen had moved in similar directions in recent years because the two economies shared several conditions, including reliance on Middle Eastern oil, large-scale investment plans in the US, household funds flowing overseas and interest-rate gaps with the US. As recently as the end of last month, the one-year correlation coefficient between the won-dollar and yen-dollar exchange rates stood at 0.9. A reading closer to 1 indicates stronger co-movement.

As of July 24, the one-month correlation between the two exchange rates had reversed to minus 0.6. Over the past three weeks, the won-dollar exchange rate fell by nearly 100 won, signaling won strength, while the yen-dollar rate climbed to its highest level in 40 years. The won-yen exchange rate also fell to 895.44 won per 100 yen, the lowest in about one year and eight months.

A key reason for the divergence is that the won turned stronger as supply and demand shifted in South Korea’s foreign-exchange market. The $25.6 billion raised through SK Hynix’s American depositary receipt listing has begun flowing into the local FX market, quickly changing investor sentiment. As the view spread that the exchange rate had reached a short-term peak, other exporters also moved to sell dollars aggressively.

An easing in foreign selling of South Korean equities also supported the won. Foreign investors, who were net sellers of 149 trillion won in the Kospi market in the first half and helped weaken the currency, turned into net buyers of 2.546 trillion won over the two weeks from July 13 to July 24. A foreign-exchange dealer at a local bank said expectations for continued dollar selling by SK Hynix meant the exchange rate dropped sharply on down days while gains were limited on up days. Sentiment has completely shifted from a month ago, and short-dollar strategies are increasingly seen as effective, the dealer added.

Korea-Japan Economic Fundamentals Also Reflected in Exchange Rates

Differences in economic fundamentals and monetary-policy direction have also split the paths of the two currencies. As optimism grows that South Korea’s economy will expand well above 3% this year on the back of a semiconductor boom, market participants are betting the Bank of Korea will raise rates at least two or three more times.

The International Monetary Fund recently cut Japan’s 2026 growth forecast to 0.6% from 0.7% in April. The yen is also under pressure from expectations that the Bank of Japan will move slowly on further rate increases as the Japanese government maintains an expansionary fiscal stance. If that trend continues, the Korea-US and US-Japan interest-rate gaps, now at 1.0 percentage point and 2.5 percentage points respectively, could widen further. Ha Geon-hyeong, a research fellow at Shinhan Securities, said capital outflows through yen carry trades remain heavy because of the BOJ’s slow pace of rate increases.

Experts expect the won-yen decoupling to continue for now. Unless the Kospi rebounds to its previous high, foreign selling of South Korean stocks is unlikely to rise as sharply as it did in the past, while SK Hynix’s dollar sales should continue to support the won for the time being. Some also say the pace of declines in the won-dollar exchange rate may slow after next month, when most of SK Hynix’s flows have been absorbed. If demand to buy dollars on dips emerges, the won-dollar rate could trade around 1,450 won.

The yen’s direction will likely depend on developments in the Middle East and whether the Bank of Japan delivers additional rate hikes. If the conflict in the region drags on and raises concern about further US monetary tightening, the dollar could strengthen further and add pressure on the yen.

Shim Seong-mi, Hankyung.com reporter smshim@hankyung.com