As news of trade negotiations with the United States causes the value of Taiwan's currency to surge, the Korean won is also appreciating. The won tends to move in the same direction as the Taiwanese dollar, functioning as a hedge against currency fluctuations. The market expects the exchange rate to drop to 1,330 won in the second half of the year, when early elections and U.S.-Korea trade negotiations are anticipated to be concluded.
According to the Seoul foreign exchange market on the 7th, the won-dollar exchange rate opened at 1,380 won, down 25.3 won from the previous trading day's closing price (as of 3:30 p.m.). This marks the first time the exchange rate has fallen below 1,400 won in weekly trading since Dec. 2 last year (1,396.0 won) just before the state of emergency. Based on the opening exchange rate, this is the lowest level since Nov. 6 last year (1,374.0 won).
◇ Korean won plunges to 1,380 won as Taiwan currency appreciates
Rumors that exchange rates were discussed in trade negotiations between the United States and Taiwan spurred a surge in demand for currency hedging (hedge · transactions that eliminate exchange rate fluctuation risks). The Taiwanese authorities announced in a statement on the 3rd that the preliminary trade negotiations with the United States concluded on the 1st. This has increased market expectations that the Taiwanese authorities will allow currency appreciation.
Typically, currency hedging is performed through domestic currency. For example, in a situation where the value of the Taiwanese dollar is expected to rise, suppose a Taiwanese investor holds U.S. dollar assets. This investor can mitigate exchange rate risks by selling dollars at the current price before the dollar value drops further and entering into a futures contract to buy Taiwanese dollars.
However, it is not easy to enter into futures contracts for currencies with low transaction volumes like the Taiwanese dollar. In this case, investors use a liquid currency that moves similarly to their domestic currency to mitigate exchange rate risks. The won has a high correlation with the Taiwanese dollar and large transaction volumes, making it a commonly used currency for proxy hedging among Taiwanese investors. As a result, an increase in demand for the Taiwanese dollar leads to a strengthening of the won.
Jo Yong-gu, a researcher at Shinyoung Securities, noted, “The possibility of dollar weakness is causing a surge in hedge demand, particularly among Taiwanese life insurance companies.” He explained that “Taiwan is experiencing rapid aging similar to our country, and life insurance companies hold significant funds.” As of 2023, Taiwanese life insurance companies are known to hold most of their assets, approximately 23 trillion Taiwanese dollars (about $76.21 billion), in U.S. bonds.
The upcoming official talks between the United States and China this week in Switzerland also contributed to the appreciation of the won. Min Kyung-won, a researcher at Woori Bank, stated, “News of the date between the two giants (the United States and China) is stimulating the strength of Asian currencies,” adding that “exporters' aggressive selling and offshore short (dollar selling) plays are factors weighing heavily on the upper limit of the exchange rate.”
◇ Additional appreciation possible with progress in U.S.-Korea negotiations… '1,330s also possible'
The market is paying attention to the potential for a rebound as factors that had been pressing down the value of the won have eased. In particular, as the issue of exchange rates was mentioned during tariff negotiations between the United States and South Korea, there is growing anticipation that the foreign exchange authorities will also allow the appreciation of the won as negotiations progress. If the won continues to strengthen, the selling pressure from foreign investors in the domestic stock market could weaken, leading to increased demand for the won.
Most experts expect the exchange rate to fall to the mid-1,300 won range. Jo Yong-gu stated, “Although the exchange rate has dropped by about 40 won recently, considering the weak dollar and domestic economic fundamentals, I believe there is room for further decline,” adding, “The exchange rate could fall to 1,360 won in the fourth quarter.”
Lee Ju-won, a researcher at DAISHIN SECURITIES, also projected, “The exchange rate will continue to show a downward stabilization trend toward the mid-1,300 won range,” stating that “due to the sharp drop in the exchange rate, domestic corporations and institutions may engage in dollar dumping, which could open up the possibility of further decline.” He added, “There is a strong possibility that the weak dollar phase will persist during the first half of the year, and I believe the downward stabilization trend is valid.”
Some experts expect the exchange rate to be in the low 1,300 won range. Kwon Ah-min, a researcher at NH Investment & Securities, predicted that the exchange rate could drop to 1,330 won due to the external weak dollar and increased dollar supply resulting from a current account surplus, explaining that “As the exchange rate is a key agenda item in negotiations with the U.S., it seems that market bets on further declines are continuing.”