Middle East Tensions, Yen Weakness, And Foreigners' Stock Selling Drive Dollar Demand
The won-dollar exchange rate index is displayed at the Kookmin Bank dealing room in Jung-gu, Seoul, on the afternoon of May 22.
The won-dollar exchange rate soared straight to the mid-1510 won range, suffering from the triple distress of reignited geopolitical risks in the Middle East, a weak yen, and massive domestic stock sell-offs by foreign investors.
In the Seoul foreign exchange market on May 22, the won-dollar exchange rate closed daytime trading (as of 3:30 p.m.) at 1517.2 won, surging 11.1 won from the previous trading day. This marks the highest level in about a month and a half since 1519.7 won on June 2, based on the closing price.
Reflecting the overnight trend of a weaker dollar, the exchange rate opened at 1504.7 won, down 1.4 won from the previous day. However, it reversed to an upward trend immediately after the opening, giving up the initial decline. Moving into the afternoon, the rate aggressively expanded its gains, raising the intraday high to 1519.4 won at one point.
The biggest trigger for the sharp rise in the exchange rate on this day was the resurging geopolitical tension in the Middle East.
As uncertainty amplified surrounding the end-of-war negotiations between the United States and Iran, international oil prices, which had fallen overnight, raised their heads again in the Asian market. In particular, foreign media reports that Iran’s Supreme Leader Ayatollah Mojtaba Khamenei ordered a ban on the overseas export of near-weapons-grade enriched uranium poured cold water on the market’s expectations for an end-of-war agreement.
Consequently, in the Asian market, the price of West Texas Intermediate (WTI) crude oil futures for July delivery rose by 1.84% from the previous session, climbing to $98.11 per barrel. This fueled risk aversion sentiment, driving the strength of the dollar.
The prominent weak yen trend in the global foreign exchange market also contributed to dragging down the value of the won. Yen selling intensified upon news that the Japanese government decided to consider drafting a supplementary budget to prepare for the economic impact of the prolonged situation in the Middle East. On this day, the yen-dollar exchange rate hovered around the level of 159.070 yen per dollar, failing to escape its weakness, and the won also coupled with the yen, expanding its decline.
The continued fierce selling streak by foreign investors in the domestic benchmark KOSPI market also acted as a primary factor in the exchange rate increase.
On this day, foreigners net sold a massive 1.9225 trillion won (approximately $1.28 billion) worth of stocks in the KOSPI market, continuing their Sell Korea trend for 12 consecutive trading days. This figure far exceeds the previous day’s net selling volume of 221.2 billion won. The reverse remittance demand to convert the proceeds from selling domestic stocks into dollars and exit strongly stimulated the dollar buying trend in the foreign exchange market.
Moon Jung-hee, chief economist at KB Kookmin Bank, analyzed, “In addition to the currency exchange demand following massive net stock selling by foreigners, the rise in international oil prices and the weak yen intertwined, leading to prevalent dollar demand across the market.” He added, “There is a tendency for the exchange rate to have moved somewhat excessively due to internal and external factors leaning toward dollar supply and demand, rather than the fundamental factors of the won itself.”
Meanwhile, foreign exchange authorities stepped in with a verbal intervention to stabilize the exchange rate. In a message released just before the close of daytime trading in the Seoul foreign exchange market on this day, the Bank of Korea and the Ministry of Finance and Economy stated, “The foreign exchange authorities are watching with a sense of caution as the won-dollar exchange rate movements have an excessive aspect compared to fundamentals,” adding, “We will take decisive action if necessary.”
On this day, the KOSPI closed slightly higher at the 7840 mark as buying by individual and institutional investors continued despite selling by foreigners. The KOSDAQ, benefiting from the complete sell-out of the National Growth Fund, surged by about 5%.
On this day, the KOSPI closed at 7847.71, up 0.41% from the previous trading day. At one point during the session, it was pushed down to the 7780 mark, shifting to a decline, but as supply and demand continued steadily, the market closed in flat territory.
By investor type, foreigners continued their net selling trend for the second consecutive day, focusing on profit realization. Foreigners alone net sold 1.9225 trillion won. However, individuals and institutions net bought 1.0639 trillion won and 760.1 billion won, respectively, thwarting the downward pressure.
Top market capitalization stocks also remained relatively flat, but their fortunes were mixed. Samsung Electronics (-2.34%), Samsung Electronics Pref. (-0.16%), Hyundai Motor (-1.65%), and LG Energy Solution (-0.62%) fell, while SK Hynix (0.05%), SK Square (0.51%), Samsung Life Insurance (2.68%), Doosan Enerbility (2.95%), and HD Hyundai Heavy Industries (1.19%) rose. Samsung Electro-Mechanics (11.30%) alone showed a sharp surge, surpassing 100 trillion won in market capitalization and jumping to the top 6th position.
The KOSDAQ closed at 1161.13, surging 4.99% from the previous trading day. This is interpreted as the result of renewed interest in growth stocks as the National Growth Fund, launched on this day, completely sold out in 30 minutes. Individuals net sold 865.5 billion won, while foreigners and institutions net bought 597.4 billion won and 287.8 billion won, respectively.
Top market capitalization stocks on the KOSDAQ all posted gains. EcoPro BM (10.77%), EcoPro (12.87%), Alteogen (3.70%), Rainbow Robotics (1.48%), Jusung Engineering (20.95%), Kolon TissueGene (3.59%), Samchundang Pharm (4.79%), Leeno Industrial (2.40%), EO Technics (4.37%), and HLB (8.76%) all rose.
Yoon Young-sil
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