Exchange Rate Fall Defies Expectations

“Dollar demand from overseas investors who want to send dividends to their countries will drive the exchange rate higher for the time being,” said Park Seung, former governor of the Bank of Korea (BOK), on March 9. Most market watchers nodded at the remark.

The won’s exchange rate against the U.S. dollar was around the 980 won range at the time. But the rate dropped under 960 won in just a month. The situation unfolded contrary to Park’s expectations.

What happened?

At market close yesterday, the won-dollar exchange rate was 957.3 won, a 5.9 won drop from the previous day.

It is the first time since October 28, 1997 that the rate has fallen under the 960 won mark.

Roh Sang-chil, foreign currency affairs manager for Kookmin Bank, said, “The BOK governor expected an exchange rate hike from late March to early April last year, and that turned into a reality,” adding, “The problem is that domestic exporters who experienced a ‘learning effect’ predicted the demand of dividend transfers by foreigners and responded to it this year.”

Foreigners receive their dividends in March or April every year and send the money to their countries. They sell the won and buy the dollar to transfer the money, which raised the won-dollar exchange rate last year.

This year, exporters predicted such a situation and waited for the demand for money transfers to increase in order to sell their dollar reserves at higher prices. But the prediction was off the mark. Contrary to the prediction, the exchange rate decreased. This led exporters to rush to sell their dollar reserves at the same time, which expedited the decline in the exchange rate.

The situation proves how much influence a BOK governor’s remark has on the exchange market. In a way, it symbolically represents the limit of the authorities’ forecasting ability.

Overseas stock-buying power-

The domestic stock market has been weak from the beginning of this year. Some anticipated the “Sell Korea” phenomenon in which foreigners bought shares last year when the KOSPI Index was in the 600 range, will sell the shares and leave this year because the index has reached 1,300.

If the prediction had turned out to be correct, demand for dollars would increase on the Seoul Foreign Exchange Market, which would raise the exchange rate.

But foreigners moved in the opposite direction. The domestic stock market picked up for its 10th consecutive business day yesterday. Net purchase by foreigners was 497.9 billion won on April 4 alone and 327.6 billion won yesterday.

Lee Jung-wook, manager at Woori Bank responsible for managing the foreign exchange market, said, “Foreign exchange dealers are the most interested in foreigners’ stock buying.”

Lee Yun-seok, researcher at Korea Institute of Finance, said, “The chair of the U.S. federal reserve does not talk about the exchange rate,” adding, “Participants in the Korean market should not wholly depend on authorities’ prediction but nurture the ability to make judgment on their own.”

Noh at Kookmin Bank said, “We expected that the current level to be the ‘bottom,’ but the bottom came too early. If the exchange rate goes down again on April 6, it could drop below the 940 won mark.”

Sang-Hoon Kim sanhkim@donga.com