South Korean stocks plunge—why does the South Korean won strengthen instead?

Since the beginning of this year, the Korean won has shown a clear negative correlation with the Korean stock market. In the first half, the Korean stock market delivered the best performance globally, but the won was the worst among Asian emerging markets. However, since July, as the Korean stock market has suffered a major drop, the won has reversed course, rising from the 1550 level and breaking above 1500.

Chart: Negative correlation between the Korean won and the Korea KOSPI Index

1. Reasons for the won’s depreciation in the first half

From a fundamentals perspective, multiple indicators of the Korean economy have improved significantly: AI compute capacity capex provides long-cycle support for the resilience of Korean exports; export year-on-year growth reached 70.9% in June 2026; the cumulative trade surplus for January to June was $138.3B, setting a historical high. Semiconductor exports helped Korea’s first-quarter GDP growth reach 17.1%. The Bank of Korea has issued hawkish rate-hike signals, and the market expects the first rate hike in July, with 2 rate hikes within the year.

So what exactly caused the won to keep depreciating?

Reason 1: Rising value of foreign investors’ equity holdings leads to FX hedging demand

Korean stocks rise --> the value of Korean stock holdings by foreign investors increases --> the won’s FX exposure increases --> foreign investors passively buy USDKRW forwards to hedge.

According to BNP statistics, foreign investors held an exposure of about $16k worth of Korean stocks at the start of the year; it is estimated that this figure has now grown to $1.6 trillion (driven mainly by valuation gains). Assuming a hedging ratio of 10%, then for every 1% move in KOSPI, about $1.6 billion in FX hedging adjustments are needed.

Reason 2: Foreign investors continue to sell Korean stocks

Since the beginning of this year, foreign investors have cumulatively sold $1.025 billion worth of Korean stocks. Foreign investors’ selling of Korean equities is not because they do not like Korean stocks; rather, it is passive de-risking under fund regulations. Because overseas funds have strict rules that limit any single stock’s position to a certain proportion, and because shares of Samsung and SK hynix surged, their holdings exceeded limits, triggering forced passive reductions.

Reason 3: Trade surplus was not converted into corporate FX conversion

Korean companies increased their retention of overseas-held dollars and expanded direct investment in the U.S. Korean companies and residents’ foreign-currency deposits have also risen significantly.

2. Reasons for the won’s recent upswing and appreciation

Reason 1: Falling Korean stocks lead to foreign investors’ FX hedging sell-offs

The logic chain is the opposite of the first half: Korean stocks rise --> the value of Korean stock holdings by foreign investors increases --> the won’s FX exposure increases --> foreign investors buy USDKRW forwards to hedge.

Actually, the recent KOSPI plunge was not led by foreign investors selling. Data shows that over the past week, the pace of foreign investor outflows has slowed. After SK hynix’s U.S.-listed ADR began trading, the market concentrated in closing out crowded long positions in the stored-chip sector; combined with a sudden geopolitical incident in the Middle East that dealt a blow to Asia-wide risk appetite, it drove this round of sharp Korean stock sell-off.

Reason 2: Dollar FX conversion by SK hynix after listing in the U.S.

SK hynix listed on Nasdaq on July 10 and raised $26.5 billion. According to the company’s disclosures, part of the funds raised in dollars will be used for domestic capital expenditures, and the market expects corporate FX conversion of dollars to continue from July through August.

3. Summary:

1. The won has been gradually “yen-ified”: when the stock market rises, the domestic currency exchange rate depreciates; when the stock market falls, the domestic currency exchange rate appreciates. The main reason is changes in the FX hedging demand caused by movements in foreign investors’ existing equity holdings’ value.

2. The recent big drop in Korean stocks is more of a “mispricing expectation correction plus emotional sell-offs after stocks reached high levels.” The long-term AI compute capacity demand logic and the fundamentals for storage chips have not changed. It is expected that after leveraged funds complete their de-risking and sell-offs in the near term, Korean stocks will resume their uptrend, putting pressure on the won to weaken.

3. From a medium-to-long term perspective, Korean semiconductor companies have recently announced plans for large domestic capital expenditures in close succession. Companies need to convert their dollar revenues into won for spending. This will be favorable for the won from both the supply-demand side. It is expected that USDKRW will remain in the $1450-1550 range.

Source of this article: Good morning FX market

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