Won’s Drop Into 1,300 Range Spurs Bargain Buying of Dollars, Yen

Won strengthens in second half as foreign-currency exchanges increase

Won-dollar rate falls 176.9 won in two months on corporate selling, rate hikes

More downside possible this year if Samsung, SK Hynix boost shareholder returns

Retail buyers snap up dollars and yen on hopes of foreign-exchange gains

Banks roll out fee-free products to capture demand

The won, which weakened through the first half, has rebounded sharply in the second half. The unexpected swing in the exchange rate is prompting individuals to buy foreign currencies while they are cheaper. Demand has been especially strong for the dollar and the yen, both long seen as safe-haven assets. Banks are also stepping up competition for foreign-exchange customers with specialized products.

Exchange rate drops sharply

According to the Seoul foreign-exchange market, the won closed at 1,372.5 per dollar on Aug. 28, down 176.9 won from 1,549.4 won at the end of June.

A surge in won conversions by South Korean companies is the main reason for the sharp drop in the exchange rate. SK Hynix began converting about $2.65 billion raised through an American depositary receipt offering in the US market in July into won. Last month, other companies also converted dollar holdings into won to make interim corporate tax payments. Korea Investment & Securities estimated those payments totaled 46.1 trillion won, or about $33.3 billion, last month. That was about 30 trillion won more than in August last year, when the figure stood at 15.9 trillion won.

The easing of foreign investors' stock selling and consecutive benchmark rate hikes by the Bank of Korea also helped the won regain strength.

Lee Jung-hoon, an analyst at Daishin Securities, said overseas investment by individuals is still increasing, but companies remain active in converting dollars into won. He added that the won-dollar rate could fall to 1,350 this year if Samsung Electronics and SK Hynix carry out large-scale shareholder returns and domestic investment that create additional demand for won conversion.

The drop in the won-yen rate is also being driven largely by the won's strength. Japan's lower interest rates relative to the US and South Korea are also supporting yen weakness. The won-yen rate fell to 860.61 won per 100 yen on Aug. 28 from 954.95 won at the end of June.

Retail investors buy the dip

As the dollar and yen weakened sharply, retail investors moved in to buy. Personal customers at South Korea's five major banks — KB Kookmin, Shinhan, Hana, Woori and NongHyup — exchanged a combined 1.47 trillion won, or about $1.06 billion, into dollars and yen in July and August through Aug. 27. That included $686 million converted into dollars and 61.9 billion yen converted into the Japanese currency.

Exchange volumes rose especially sharply in July, when the decline in exchange rates was steepest. Dollar exchanges totaled $349 million, the highest in six months since January last year, when expectations for further dollar strength pushed the monthly total to $506 million. Yen exchanges totaled 37.6 billion yen over the same period, more than double the 18.5 billion yen recorded a year earlier. The increase reflected not only demand from investors seeking foreign-exchange gains, but also summer vacation demand from travelers looking to reduce overseas travel costs.

Dollar and yen deposits are also increasing. Dollar deposits at the five major banks stood at $76.2 billion as of Aug. 27, up about $6.8 billion so far this month. Yen deposits totaled 1.3807 trillion yen, an increase of 341.9 billion yen over the same period. Lee Min-hyuk, an economist at KB Kookmin Bank, said both the dollar and the yen have fallen more than 100 won from their peaks, making this a favorable time to buy. He also recommended buying in installments because exchange rates could fall further amid fiscal deficit concerns in both the US and Japan.

Automatic foreign-currency purchases offered with no fees

Banks are also expanding benefits on foreign-exchange products to match the shift in demand. Toss Bank has long targeted customers pursuing so-called FX investing with a strategy of charging no fees on either foreign-currency purchases or sales. Its recently launched Foreign Currency Piggy Bank allows users to set up automatic transfers and accumulate dollars in preset amounts without going through a separate exchange process. The minimum daily investment is 10,000 won, making it an option for customers who want to build dollar holdings gradually.

For customers seeking higher interest income, KakaoBank's Dollar Safe Box is another product drawing attention. The product offers an annual interest rate of 2.1% even if dollars are deposited for just one day. KakaoBank also launched a foreign-currency account in June that charges no exchange fees when customers buy foreign currencies.

Woori Bank plans to launch a service in September that will allow customers to use foreign currencies held in its Exchange Wallet to make QR-code payments overseas. The service will use the UnionPay network, allowing smartphone-based payments in major countries. The bank also charges no fees when customers buy foreign currencies. Shinhan Bank's SOL Travel Foreign Currency Deposit account also offers a 100% exchange-rate fee discount.

Unlike purchases, most banks still charge fees when customers sell foreign currencies. KakaoBank currently offers a 70% preferential rate, while Woori Bank and Shinhan Bank apply a 50% discount.

Kim Jin-seong, Hankyung.com reporter jskim1028@hankyung.com