Viewing Foreign Currency (Dollar, Yen) as an Asset
Have you heard someone say, 'I exchanged some money into dollars because I think the dollar will rise'? Is simply holding foreign currency an investment too? And if so, what generates the return?
Viewing foreign currency as an 'asset'
Foreign currency is another country's money, like dollars, yen, and euros. It's the money you exchange when you travel. But some people hold this foreign currency as an 'asset' rather than for travel.
For example, someone who converts won into dollars, saying 'the dollar seems likely to strengthen against the won going forward.' If the dollar's value (the exchange rate) later rises, they gain; if it falls, they lose.
Foreign currency can be viewed as one type of asset, but the way returns arise differs fundamentally from stocks and bonds. Understanding this difference is key.
Foreign currency return = interest + exchange-rate change
The total return from holding foreign currency divides broadly into two parts.
First, interest. If you make a deposit or buy a bond in that currency, interest accrues. For example, a dollar deposit pays interest linked to U.S. rates.
Second, exchange-rate change. If the foreign currency you hold rises against the won, you gain; if it falls, you lose.
But there's an important trap. If you just hold it as plain cash or in a foreign-currency wallet, no interest accrues. Interest arises only when you 'entrust' it somewhere, like a deposit or a bond. That is, putting dollar bills in a drawer leans solely on exchange-rate changes.
Exchange-rate changes go both ways. A rise is a gain but a fall is a loss, and guessing the direction in advance is hard even for experts. This article does not predict the future direction of any specific currency.
How much does the exchange rate swing — the history of KRW/USD
It's easy to think exchange rates are 'stable,' but in reality they move quite a lot.
The KRW/USD exchange rate, looking at just the last few years, has swung roughly from the 1,100-won range to near 1,450 won. This alone is a swing of around 20–30%.
A more extreme case is the 1997 foreign-exchange crisis (the IMF crisis). At that time, the KRW/USD rate, which had been in the 900-won range, exceeded 1,900 won in just a few weeks. Someone holding dollars saw their won-denominated assets double while sitting still, while conversely companies and individuals with dollar debt suffered heavy blows.
As this shows, exchange rates can move sharply during a crisis, so even though foreign currency feels like a 'safe-haven asset,' it is by no means free of swings.
Exchange-rate figures differ by point in time and source. The 1997 peak is reported, depending on the material, as being in the 1,900-won range to near 2,000 won. The key point is that the exchange rate can swing very greatly during a crisis.
The limitation of foreign currency: it cannot make money by itself
There's something you must remember when looking at foreign currency: money in cash form is itself not a 'productive asset.'
Stocks pay dividends when a company earns profits, bonds pay interest, and real estate pays monthly rent. This way, assets create cash flow by themselves. But foreign-currency cash creates nothing by itself. It leans solely on whether its value rises or falls against other currencies (and the interest earned when entrusted).
On top of that, when buying and selling, the bank sets a difference (spread) between its buying price and selling price, and exchange and remittance fees are attached. These costs are hard to notice, but they eat into returns.
So foreign currency is also discussed as a 'tool for spreading risk' in asset allocation, but it's hard to view it in itself as a source of long-term returns. You must also remember that betting on the direction of the exchange rate is in the realm of prediction.
Frequently Asked Questions
Q. I heard the dollar is a 'safe-haven asset'—if I hold it, will I at least not lose?
The dollar is called a 'safe-haven asset' because it tends to strengthen relatively during a crisis, but that doesn't mean there's no loss. If the KRW/USD rate falls, you take a loss in won terms, and if you hold it only in cash, there's no interest either. Exchange spreads and fees are also costs. 'Safe' and 'loss-free' are different.
Q. So is there no need to hold foreign currency?
It's not that 'there's no need,' but that you should 'know its character and view it accordingly.' Foreign currency is also discussed as a way to diversify specific country/currency risk by splitting assets across several currencies. That said, you must approach it understanding the limitation that it is not itself an asset that creates cash flow like dividends or interest, and that its return is heavily swayed by the direction of the exchange rate.
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