Won-Dollar Exchange Rate Plunges 125 Won in a Month... Largest Drop Since March 2009

The won-dollar exchange rate, which had been ceaselessly rising, dropped by more than 125 won over the past month, marking the largest decline in 15 years since March 2009. This sharp depreciation was influenced by increased dollar supply, including capital inflows related to SK Hynix's American Depositary Receipt (ADR) issuance and export companies' negotiable instruments. The Bank of Korea's decision last month to raise the base interest rate from 2.50% to 2.75% annually, which narrowed the interest rate gap between Korea and the U.S., also supported the strengthening of the won.

Robust export performance also served as a factor supporting the short-term decline in the exchange rate. According to the Ministry of Trade, Industry and Energy, exports in July reached $98.89 billion, a 62.8% increase year-on-year, marking the second-largest monthly figure on record. In the same month, semiconductor exports surged 178.8% to $41.01 billion, and the trade balance recorded a surplus of $30.32 billion.

An analysis by Sangsangin Securities of exchange rate fluctuation factors from early 2022 to June this year revealed that the current account surplus exerted a 29 percentage point downward pressure on the won-dollar exchange rate. Conversely, domestic investment in foreign securities during the same period created an upward pressure of 29 percentage points, offsetting the decline. Sangsangin Securities analyzed the trajectory of the won-dollar exchange rate based on the examples of Taiwan and Germany, where trade surpluses and foreign investment coexist.

Choi Ye-chan, a researcher at Sangsangin Securities, noted that a meaningful appreciation of the won is possible not simply due to the scale of the trade surplus, but when the speed of foreign capital outflow slows and incentives emerge for capital to flow back into the country.