The Korean won has depreciated sharply against the dollar despite South Korea's semiconductor export boom and record current account surplus, becoming the second-weakest currency among G20 nations after the Turkish lira, according to analysis by Lim Hye-yoon, researcher at Hanwha Investment & Securities, in a report published July 3. The won/dollar exchange rate rose from around 1450 won to over 1550 won, even as the country's Jan-Apr merchandise surplus surged 240% year-on-year to 108.1 billion dollars. The paradox stems from corporate and individual behavior: businesses are keeping dollar earnings in overseas subsidiaries rather than repatriating funds, while residents are holding foreign currency deposits instead of converting to won, creating a supply-demand imbalance in the foreign exchange market despite strong export fundamentals.
South Korea Records Historic Current Account Surplus
South Korea's current account surplus reached a record 123.1 billion dollars last year, with both current account and financial account net assets hitting all-time highs. The Jan-Apr merchandise surplus alone totaled 108.1 billion dollars, representing a 240% increase compared to the same period one year earlier. Some forecasts project the current account surplus could exceed 300 billion dollars for the full year, driven by strong semiconductor exports. The financial account net assets—calculated as domestic investment abroad minus foreign investment in South Korea—also increased by 119.8 billion dollars last year to reach a record level.
Dollar Inflows Remain Offshore Despite Accounting Records
A significant gap exists between accounting records and actual dollar inflows into South Korea's foreign exchange market. Reinvested earnings income—profits earned by Korean companies' overseas subsidiaries that remain undistributed abroad—increased 124% in Jan-Apr compared to one year earlier. These funds contribute to the current account surplus in official statistics but do not supply dollars to the domestic foreign exchange market. Additionally, foreign currency deposits held by residents at domestic banks have increased for two consecutive months, indicating that even dollars entering South Korea are not being converted to won.
Foreign Investment Outflows Continue While Inflows Decline
Domestic investors maintained steady overseas investment activity while foreign investment in South Korean assets declined. Foreign investors sold Korean stocks heavily in May-June, though these transactions have not yet been fully reflected in balance of payments statistics. Domestic investment abroad is trending to exceed last year's record levels. The combination of lower-than-expected dollar supply and sustained dollar demand has created downward pressure on the won's value, according to Hanwha Investment & Securities' analysis.
FAQ
Why did the Korean won weaken despite strong semiconductor exports?
The won weakened because Korean companies are keeping dollar earnings in overseas subsidiaries rather than repatriating funds, and domestic residents are holding foreign currency deposits instead of converting to won. This creates a dollar supply shortage in the domestic foreign exchange market despite strong export performance.
How much did South Korea's current account surplus increase in Jan-Apr?
South Korea's Jan-Apr merchandise surplus reached 108.1 billion dollars, representing a 240% increase compared to the same period one year earlier. Last year's full-year current account surplus totaled a record 123.1 billion dollars.
