Capital Flows and Exchange Rates — When Money Moves, the Rate Moves
The news 'foreigners sold trillions of won today'—why does it come out together with the exchange rate? Let us examine how the flow of money crossing borders pushes and pulls the exchange rate.
When capital comes in, the currency strengthens
The exchange rate is ultimately set by the supply and demand of two currencies. A big variable here is the 'flow of capital crossing borders (capital flows).'
To buy Korean stocks or bonds, foreigners must first convert dollars into won. As won demand rises this way, the won strengthens (the rate falls).
Conversely, when foreigners sell Korean assets and leave, they convert the won they receive back into dollars. Selling won and buying dollars weakens the won (the rate rises).
So 'foreign net buying/selling' directly affects not only stock prices but also the exchange rate. The currency of a country into which funds flow faces appreciation pressure, and the currency of a country from which they flow out faces depreciation pressure.
Capital flows are broadly divided into long-term (direct investment) and short-term (portfolio investment such as stocks and bonds). The more short-term the money, the more fickle it is and the more sharply it shakes the exchange rate.
A 'sudden stop' invites a crisis
The phenomenon in which foreign funds that had steadily flowed in suddenly stop one day and reverse is called a 'sudden stop.'
This is the typical trigger of emerging-market crises. When U.S. rates rise or the world becomes anxious, risk-averse funds leave emerging markets all at once.
Then two things happen at the same time. Asset prices fall (stocks and bond prices decline), and the currency plunges (the rate spikes). The 1997 Asian crisis and the 2018 emerging-market crisis we saw earlier are both examples of this sudden stop.
The more dollar debt a country has, the greater the blow. When the currency weakens the debt to be repaid swells, and to repay it they sell the currency again, creating a vicious cycle.
What it means for investors
Capital flows are a giant wave that individuals cannot control, but understanding them lets you face the risk with less surprise.
First, emerging-market assets have the trait of being 'good when funds pour in and doubly painful when they flow out.' This is because asset-price declines and currency plunges overlap.
Second, that is why emerging-market investment must always view 'currency risk' together, not just the return. This is because the actual return converted to won is the product of the local asset price and the exchange rate.
This is exactly why 'The Return of Almost Everything' shows the exchange-rate effect of overseas assets separately. Where funds will flow cannot be predicted, but the impact of that flow on the exchange rate and returns can be confirmed with data.
常见问题
Q. When foreigners sell, does the exchange rate always rise?
The tendency is so, but it is not absolute. Even if foreign selling creates won-weakness pressure, if other forces such as export-payment inflows or intervention by authorities act in the opposite direction at the same time, the exchange rate may move less. The exchange rate is set by the sum of countless capital flows, so it is hard to determine the direction from a single factor alone.
Q. Do countries sometimes impose regulations to prevent capital outflows?
Yes. Some countries restrict outflows with 'capital controls' during sudden capital flight. However, this is a double-edged sword that can lower the confidence of foreign investors and reduce fund inflows in the long run, so it is used cautiously.
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📋 结果基于历史数据计算,过去的收益不代表未来的收益。
📋 本服务旨在帮助理解投资、供教育之用,并非投资建议。