Foreign Investors' Sell-off + Global Dollar Demand Surge Impact
Domestic Securities Firms' Overhedging and Margin Call Demand Also Fuel Sharp Exchange Rate Rise
[Asia Economy Reporter Eunbyeol Kim] On the morning of the 19th, the KRW-USD exchange rate surged, approaching the 1,300 won per dollar mark during intraday trading. This was influenced by a global shortage of dollars.
As of 1:38 PM in the Seoul foreign exchange market, the KRW-USD exchange rate was trading at 1,285.70 won, up from the previous day. The exchange rate started with a sharp rise at the opening and continued its upward trend during the day, accelerating as the KOSPI index widened its losses. Around 11 AM, when the KOSPI threatened the 1,500 level, the exchange rate reached an intraday high of 1,297.5 won.
This intraday high is the highest recorded in 11 years since July 14, 2009 (intraday 1,303.0 won), when the effects of the financial crisis lingered.
The exchange rate somewhat stabilized after the foreign exchange authorities made verbal intervention remarks, stating that "the one-sided skew of the KRW-USD exchange rate compared to fundamentals is excessive."
The volatility of the exchange rate also induced fear. The intraday fluctuation (high minus low) was 49.9 won, nearly 50 won. This is the largest fluctuation in 10 years since May 25, 2010 (53 won), when the European debt crisis and the Cheonan incident overlapped.
The sharp rise in the KRW-USD exchange rate is caused by multiple factors acting simultaneously.
First, the spread of the novel coronavirus disease (COVID-19) has caused the dollar to surge. Global investors are withdrawing investments from stocks and bonds alike and holding cash (dollars). The dollar index, which reflects the value of the dollar against six major currencies, has surpassed 100. Due to the ongoing shortage of dollar cash, prices of most assets excluding dollar cash, such as U.S. long-term government bonds, stocks, and commodities, are falling.
In Korea, the sharp decline in the stock market and the outflow of foreign investors like a receding tide are also cited as causes of the exchange rate surge. Foreign investors are selling stocks, creating demand for currency exchange and thus a sharp increase in dollar demand.
Institutions, including Korean securities firms, have invested in overseas stock index futures, which has significantly increased dollar demand. Typically, securities firms use dollar borrowing through 'buy and sell' transactions in the swap market rather than buying dollars in the spot foreign exchange market when investing in overseas stocks. However, with the recent sharp stock price plunge, situations such as over-hedging and margin calls at maturity have caused dollar demand to exceed expectations. Dollar demand has greatly increased in the process of replenishing margin used for futures investment.
Not only companies but also hedge funds increasing dollar demand while adjusting portfolios at the end of the quarter is another factor fueling the exchange rate.
Moon Hongcheol, a researcher at DB Financial Investment, said, "Because dollar cash is needed, long-term U.S. Treasury yields rose significantly in the U.S. the day before," adding, "With the global stock price decline, if additional margin calls come from overseas, they must be paid in dollars, so domestic dollar cash demand is increasing." He also said, "Given the current situation, exchange rate forecasts seem meaningless."
Jo Youngmoo, a research fellow at LG Economic Research Institute, said, "When financial and foreign exchange markets are unstable as they are now, it would help to conclude a Korea-U.S. currency swap agreement as soon as possible to ease market instability."
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