Kospi Rises as Won-Dollar Rate Climbs in Unusual Tandem Move

Foreign Buying of Dollar Futures Drives Move

Oil-Dollar Rule for Exchange Rate Also Breaks Down

An unusual pattern has persisted since late October, with South Korean stocks and the won-dollar exchange rate rising together. In the foreign-exchange market, a stock rally would typically draw in foreign investors' dollar funds and push the exchange rate lower. Foreign investors' currency hedging to reduce exchange-rate risk is being cited as the reason that pattern has broken down.

As of 3:30 p.m. on Nov. 4, the won-dollar exchange rate stood at 1,341.5 won per dollar, up 0.5 won. The pair had traded in the 1,320 won range through Oct. 27, but jumped nearly 20 won in the past week. The rise was especially pronounced on Oct. 28 and Nov. 2. On Oct. 28, the exchange rate surged 14 won to 1,337.7. On Nov. 2, it climbed 9.5 won to 1,343.8.

By coincidence, both moves came on days when South Korean stocks posted sharp gains. The Kospi rose 6.63% on Oct. 28 and 2.24% on Nov. 2. Normally, when foreign investors are net buyers of local shares, they convert dollars into won, increasing demand for the Korean currency and lifting its value. Recently, however, foreign stock buying and a rising won-dollar exchange rate have occurred at the same time.

Foreign investors' demand for currency hedges is being cited as the backdrop. The explanation is that overseas investors buying local shares are also purchasing dollar futures to guard against a possible decline in the won. When investors buy dollar futures, banks on the other side of the trade buy dollars in the spot market, pushing the exchange rate higher.

Since the second half of the year, the rule of thumb that higher oil prices mean a higher won-dollar exchange rate has also broken down. West Texas Intermediate, which was below $70 a barrel in early July, has recently risen to the $96 range. Over the same period, however, the won-dollar exchange rate fell by more than 200 won, from 1,555 won to 1,340 won. That marks a contrast with the period just after the war in the Middle East began, when the exchange rate reacted sharply whenever global oil prices jumped.

The usual relationship in which a stronger dollar translates into a weaker won has also failed to hold. The dollar index fell to the 98 level in September and has recently climbed to the 101 level. Over the same period, however, the won-dollar exchange rate instead dropped by about 30 won.

The reason the usual formulas linking the won to oil prices and the dollar no longer hold is that the current-account surplus has emerged as the key driver of the exchange rate since July. "The massive volume of dollars earned by semiconductor exporters offset the impact of other external variables and led the won to strengthen," a foreign-exchange market official said.

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