Koreans’ US dollar selling spree continues in anticipation of weaker USD

US dollar investors in South Korea have not backed down from their shorting position of the currency despite the strengthening dollar against the Korean currency in the past two months, suggesting that they are betting on a rate pause from the US Federal Reserve.

According to the financial industry on Monday, the total balance of the country’s top five commercial banks’ US dollar-denominated time deposits amounted to $60.6 billion as of Sept. 12, down $668.51 million from the last day of August.

When the US dollar weakened against the Korean won from the low-1,300 won level to the mid-1,260 range in July, the total balance increased by 8% from the previous month.

But after the greenback regained strength in August, the balance has been on a downward trend. It dropped to $61.2 billion at end-August from July’s $63.6 billion.

FED RATE HOLD DIMS USD OUTLOOK  

The continued dollar selloffs suggest that currency investors are actively taking profits amid the lingering uncertainty over the dollar’s strength.

The dollar shot up to 1,341.60 won on Aug. 18 from 1,273.80 on Aug. 1 but since then it has been hovering around the 1,320 level.  

As the US Federal Reserve is highly anticipated to keep the world’s No. 1 economy’s key interest rate at 5.25-5.00% on Wednesday and maintain its rate pause stance for a while, investors appear to see no room for a further short-term rise in the dollar against the Korean won.

Countries with higher interest rate tends to attract foreign money for investments in its financial assets for higher profits, buoying demand for the country’s currency. But lower interest rates in a country leads to an investor flight from its investments, hurting demand for its currency.

Foreign exchange market analysts also forecast a weaker dollar versus the won for a while and are advising investors to refrain from additional dollar purchases.

Given the slim chance of a stronger dollar, investors need to start selling their dollars now, said Oh Kyung-seok, the head of the private banking unit at Shinhan Bank’s Private Wealth Management’s Taepyeongno branch.

OUTLOOK UNCERTAIN FOR KOREAN CURRENCY

Despite the weaker greenback outlook, it remains uncertain whether the Korean currency could further strengthen, considering the clouded outlook for Asia’s fourth-largest economy due to a slump in exports, the country’s mainstay growth stimulant.  

Its central bank last month lowered its forecast for the country’s economic growth next year to 2.2% from the previous 2.3% published in May due to the sluggish recovery in China marred by its real estate crisis and low growth rate.

The world’s second-largest economy is Korea’s biggest trading partner.

It was the second downgrade in the Bank of Korea’s economic growth forecast for 2024. In February, it projected Korea’s economy to grow by 2.4% next year.

The weak economic growth outlook could dampen demand for the country’s currency.

The US dollar traded at 1,323.20 won on Tuesday morning, down 0.21% from Monday.

Write to So-Hyun Lee at y2eonlee@hankyung.com

Sookyung Seo edited this article.