South Korea’s currency, the Won, is falling close to its weakest level since the 2008-09 global financial crisis. Normally, a country that is selling more goods to the world would see its currency become stronger. But South Korea is seeing the opposite.
As reported by Bloomberg, the Won weakened to around 1,555 against the US dollar and briefly touched 1,559.10 on Wednesday. Last month, it had slipped to 1,562.20, its weakest level since March 2009. Foreign investors sold a net 1.46 trillion won (about $938 million) worth of stocks on Wednesday. This marked the eighth straight day of selling, adding to pressure on the country’s currency.
“The dollar’s strength is such that a fresh low for the won would not be surprising,” said Moon Dawoon, an economist at Korea Investment & Securities Co in Seoul to Bloomberg. “If it does break through, it will be difficult to identify the next technical level, so from a qualitative perspective, the downside for the won should be kept open to around 1,600 per dollar.” The fall in Won comes along with similar weakness being witnessed in Japan’s Yen and India’s Rupee.
Why exports are not helping the won
South Korea has been doing very well in global trade. In June, exports jumped 70.9% from a year earlier to a record $102.25 billion, the first time monthly exports crossed the $100 billion mark.
According to a research by Korean Economic Institute of America, the country’s trade surplus, the gap between exports and imports also reached a record $36.15 billion. Semiconductor exports almost tripled to $44.82 billion, helped by strong global demand for artificial intelligence (AI) chips.
Usually, such strong exports would increase demand for the won because foreign buyers need the currency to pay Korean companies. That would normally push the currency higher. But this time, something much bigger is pulling the won down.
Why money is leaving South Korea
The biggest reason is that Korean investors are sending huge amounts of money overseas. As reported by Forbes, many people and institutions in South Korea are investing in US stocks such as Nvidia and Microsoft because they want to benefit from the AI boom. To buy these shares, they first have to sell won and buy US dollars.
Between January and November last year, Korean residents bought $129.4 billion worth of overseas securities. During the same period, South Korea’s current account surplus was about $101.8 billion. This means more money left the country than came in through trade.
South Korea earns dollars by selling AI chips to the world, but then many Koreans use those same dollars to invest in foreign markets. As a result, the money flows back out, creating steady demand for US dollars and weakening the won.
How the AI boom is helping and hurting at the same time
Artificial intelligence is creating two very different effects on South Korea’s economy. On one hand, AI has boosted demand for memory chips made by Samsung Electronics and SK Hynix, helping exports reach record highs. On the other hand, the same AI excitement has encouraged Korean investors to buy American technology stocks. This sends more money out of the country and increases demand for dollars. AI is helping South Korea earn more money through exports while also encouraging investors to move even more money abroad. Right now, those capital outflows are having a bigger impact than the export gains.
Why a weaker won is a problem
A weaker currency makes imported goods more expensive. South Korea imports a large amount of energy, including oil. Since oil prices are already high because of tensions in the Middle East, a weaker won makes those imports even costlier.
Higher import costs can increase inflation, making everyday goods and services more expensive for people. The falling currency has also hurt South Korea’s bond market, with investors expecting the Bank of Korea may have to raise interest rates to slow inflation and support the won.
What authorities are doing
South Korean authorities have tried several measures to slow the fall of the won. Officials have repeatedly warned against excessive currency moves and even carried out a rare joint inspection of banks’ foreign-exchange operations with the Financial Supervisory Service, the first such action since 2010. The government has also increased the limit for foreign-exchange stabilisation bonds to $5 billion this year and is preparing to expand a 100 trillion won market stabilisation programme.
Disclaimer: This article provides factual analysis only and is not, and should not be construed as, an offer, solicitation, or recommendation to buy or sell securities. Investors must conduct their own independent due diligence and seek advice from a registered financial advisor in the respective jurisdiction.