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Why South Korea’s won is one of world’s best performers

Currency strengthened nearly 8% against dollar last month despite tech stock sell-off

Daniel Tudor in Seoul and William Sandlund in Hong Kong

South Korea’s won went from being one of Asia’s worst performers to one of the world’s best last month as repatriation of chipmakers’ earnings, a tech sell-off and tighter monetary policy helped support the currency.

The won appreciated nearly 8 per cent against the dollar in July, making it the world’s second-best performer after the Colombian peso.

It strengthened sharply on Thursday to as much as Won1,419 a dollar before weakening to Won1,438 on Friday after a finance official said Seoul was “co-ordinating closely” with the US and Japan on currencies.

The won had suffered months of trading around multi-decade lows in the first half of the year, concerning policymakers and puzzling currency watchers because South Korea had a large trade surplus backed by its AI chip exports.

At one point, the won traded at levels last seen during the 2008-09 financial crisis, ranking it among Asia’s worst performers, ahead of only the Philippine peso, Indian rupee and Indonesian rupiah — countries exposed to the Iran war energy shock.

Analysts said the turnaround could partly be explained by investor bets that chipmakers’ domestic expansion plans would trigger sustained repatriation of overseas dollar earnings.

Samsung Electronics and SK Hynix unveiled plans in June to invest more than $1tn across several years to build AI infrastructure and semiconductor factories in South Korea — equivalent to two-thirds of the country’s annual GDP, said Abbas Keshvani, a macro strategist at RBC Capital Markets.

“It’s going to mean protracted dollar selling for a very long time,” he said.

SK Hynix also raised $26.5bn in a blockbuster US listing last month, with most of the proceeds earmarked for domestic investment.

Traders estimated about $1bn a day was being repatriated to South Korea between mid-July and mid-August through spot and forward markets, providing an additional, though temporary, source of won demand.

The currency strength comes despite the Kospi equities index losing nearly a quarter of its value last month, reflecting a global turn away from chipmaker stocks amid fears about the AI boom’s sustainability.

The sharp drop in equities helped ease foreign selling of shares and won, said Mitul Kotecha, head of Asia foreign exchange and emerging markets macro strategy at Barclays.

In the first half of the year, global fund managers heavily sold equities and took profits as the Kospi’s rapid rise left many of them overweight on South Korea relative to their benchmark allocations.

“Although foreign investors are still engaged in net selling, the intensity has dropped significantly compared with June,” said Wi Jae-hyun, a foreign exchange analyst at Kyobo Securities in Seoul.

A downturn in US tech stocks is likely to have also moderated outflows by South Korean investors, who had invested huge sums into the likes of Nvidia, Micron and SpaceX.

“Beyond fundamentals, flow dynamics have shifted at the margin in ways that support the won’s rebound,” said Julio Callegari, chief investment officer for Asia fixed income at JPMorgan.

The rebound has been reinforced by a shift in monetary policy. Last month, the Bank of Korea raised interest rates for the first time in more than three years, increasing its benchmark rate by 0.25 percentage points to 2.75 per cent.

Higher interest rates typically support a currency by increasing returns on domestic assets, making them more attractive relative to overseas investments.

“There seems to be a more concerted government effort to try and shift companies and households to repatriate more funds into Korea,” said Idanna Appio, portfolio manager and senior research analyst at First Eagle Investments.

The BoK’s more hawkish stance comes amid hotter-than-expected economic data, with GDP growth reaching 3.7 per cent in the second quarter and inflation accelerating to 3.2 per cent in June.

At a parliamentary hearing on Wednesday, Bank of Korea governor Shin Hyun-song said inflation was likely to remain above target for “a considerable period of time” and “maintaining the rate-hike trend is the most reasonable way” to control it.