USD/KRW Falls to 1,360s on Corporate Dollar Sales, Hitting Exporters

Key Takeaways

The main reason USD/KRW fell into the 1,360s was not broad dollar weakness, but dollar supply from Korean companies. Proceeds from SK hynix’s American depositary receipt issuance coincided with exporters’ month-end dollar conversions, shifting the exchange rate’s near-term direction.

What this really reveals is the quality of the won’s strength. Continued corporate dollar supply would reduce import prices and the burden of foreign-currency debt, but if the exchange rate falls rapidly while underlying dollar demand remains intact, it would weigh on exporters’ won-translated revenue and profit.

What Happened

On September 4, NH Investment & Securities forecast an average USD/KRW exchange rate of 1,380 won for the fourth quarter. It lowered the bottom end of its previous forecast range, citing stronger-than-expected corporate dollar supply. The firm said SK hynix’s ADR issuance and dollar sales by exporters created direct selling pressure in the spot foreign-exchange market.

Foreign investors’ net selling of Korean equities has also declined from the first half of the year, easing dollar demand. By contrast, Korean retail investors’ purchases of U.S. stocks, foreign direct investment, and payments related to overseas investments remain structural sources of dollar demand. This means the exchange-rate decline does not signal a broad-based improvement in Korea’s economy.

Background and Context

Corporate dollar supply should be separated into one-off financing events and recurring exporter conversions. Converting ADR proceeds can involve substantial amounts, but the impact may be short-lived. Exporter conversions tend to cluster around month-end and quarter-end, so they may move the exchange rate sharply at a particular point while weakening the following month.

The global dollar index has rebounded since July, while war-related risks and uncertainty over U.S. interest rates remain. It is therefore difficult to conclude that domestic supply-demand (order flow) alone has established won strength as a long-term trend. The market has already priced in near-term dollar supply, while U.S. inflation and the Federal Reserve’s policy path remain less fully reflected.

Impact on Markets and Stocks

• SK hynix: Conversion of the ADR proceeds drove the exchange rate lower in the short term, but sustained won strength would reduce the won-translated value of overseas revenue. The impact on profit would be limited if semiconductor prices and shipment volumes outweigh the currency effect.
• Samsung Electronics: With a high proportion of revenue denominated in dollars, a stronger won weighs on translated revenue. However, it also lowers the cost of imported equipment and components, providing a buffer on the cost side.
• Hyundai Motor: A stronger won reduces the won-translated profit from North American sales, but the company’s greater overseas production and local sourcing have lowered its exchange-rate sensitivity compared with the past.
• Korean Air: Dollar-denominated costs such as jet fuel and aircraft lease payments move lower. If the exchange rate remains below 1,400 won, the cost savings are more likely to feed through to earnings.
• Financial stocks: If won strength reduces concerns over foreign-currency liquidity, it would improve banks’ funding conditions. However, if the exchange-rate decline coincides with slowing exports, corporate credit costs could return to the forefront.

Investor Checklist

• Investors should watch whether the USD/KRW exchange rate, based on Seoul Money Brokerage Services data, falls further from the 1,360s or rebounds toward 1,400 won.
• The Bank of Korea’s foreign-exchange market reports and monthly exporter conversion volumes can help determine whether corporate supply is a one-off event or a recurring trend.
• If U.S. consumer inflation or a Federal Reserve meeting weakens expectations for rate cuts, the dollar index could rebound and reverse the exchange-rate decline.
• Investors should review the exchange-rate sensitivity of Samsung Electronics, SK hynix, and Hyundai Motor, along with actual changes in operating profit, in their next quarterly earnings.

Outlook

In the optimistic scenario, corporate dollar sales continue while foreign investors reduce their equity selling. If USD/KRW falls below 1,360 won, import prices and cost pressures on the airline and refining industry sectors would ease, while foreign investors’ won-denominated returns would improve.

In the opposing scenario, U.S. inflation exceeds expectations and hopes for Federal Reserve rate cuts weaken. A rebound in the dollar index could quickly reverse the exchange-rate decline caused by corporate supply. Investors who have assigned higher valuation multiples to exporters based on won strength should assess the durability of dollar supply-demand (order flow) before focusing on the exchange-rate level itself.

Frequently Asked Questions

What is corporate dollar supply?

It refers to exporters converting dollar holdings into won or companies bringing overseas financing and ADR issuance proceeds into Korea. The resulting increase in dollar selling tends to lower the USD/KRW exchange rate.

Is a decline in USD/KRW a negative catalyst for exporters?

It generally weighs on companies that translate overseas revenue into won. However, it also lowers imported raw-material and energy costs, so each company’s exchange-rate sensitivity depends on the currency mix of its revenue and costs.

Which indicators signal a further exchange-rate decline?

Investors should monitor U.S. consumer inflation, the Federal Reserve’s interest-rate path, the dollar index, foreign investors’ supply-demand (order flow) in Korean equities, and exporter conversion volumes. If exporter conversions decline, the momentum behind won strength would weaken, creating conditions for an exchange-rate rebound.

This article was automatically summarized and analyzed based on the original news report. View the original article (Energy Economy)