[Asia Economy Reporter Hwang Junho] Amid differing voices between the government and the Bank of Korea regarding exchange rate measures and the narrowing interest rate gap between South Korea and the United States, the won-dollar exchange rate closed at its highest level in 2 years and 1 month, raising concerns about pressure on the stock market. It is analyzed that the won's weakness will stimulate net selling by foreign investors.
Kim Daejun, a researcher at Korea Investment & Securities, stated, "We should keep in mind that the current upward trend in the exchange rate may continue," adding, "With the dollar index exceeding 102 points and the global dollar showing strength, the won may relatively weaken." The won-dollar exchange rate closed at 1,250.8 won the previous day, the highest since March 2020.
He viewed that differing voices between the South Korean government and the Bank of Korea could stimulate won weakness. Deputy Prime Minister for Economy Hong Nam-ki mentioned that the current exchange rate level is high, and the government is closely monitoring it and will take market stabilization measures if necessary, whereas Bank of Korea Governor Lee Chang-yong recently stated that the won has not depreciated significantly compared to other currencies. He analyzed that "Governor Lee's remarks were interpreted as tolerating the current won-dollar exchange rate, which accelerated the upward trend in the exchange rate."
He also saw the narrowing interest rate gap between South Korea and the United States as a burden. Currently, the benchmark interest rates are 1.50% for South Korea and 0.50% for the U.S., a 1 percentage point difference. However, as shown recently in Fed Watch, if the Federal Open Market Committee (FOMC) raises the benchmark interest rate sequentially by 50 basis points and 75 basis points in May and June, the interest rate gap will shrink rapidly. This implies an increase in the dollar's value, and the foreign exchange market is already reflecting this trend, according to Kim.
He pointed out, "From the stock market perspective, the rising exchange rate is a burden." An increase in the won-dollar exchange rate indicates won weakness, which stimulates net selling by foreign investors from a supply-demand perspective. In this process, the KOSPI mostly declines. Since 2000, in months when the won-dollar exchange rate rose by more than 3%, the KOSPI has recorded weakness with high probability.
Kim analyzed, "In phases where foreign net selling occurs, large-cap stocks tend to perform relatively worse than small- and mid-cap stocks on the KOSPI," adding, "If the current exchange rate uptrend continues, small- and mid-cap stocks may be relatively more stable than large-cap stocks in terms of size." He specifically pointed out Pulmuone, SPC Samlip, Asiana Airlines, IS Dongseo, and Dongkuk Steel as small- and mid-cap stocks with strong foreign net buying intensity.
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