[Kangkook Lee's column] Exchange Rate Soars Despite Massive Current Account Surplus… Is the National Pension Service the Culprit?

Dr. Kangkook Lee is Professor of College of Economics at Ritsumeikan University in Japan and Affiliated Research Fellow at CUKPE

As of June 19, 2026, the exchange rate of the Korean Won against the US Dollar stands at 1,523 won per dollar, based on the Bank of Korea's buying and selling rates. At the beginning of the year, the exchange rate was 1,435 won per dollar, but it has been steadily rising since then. Typically, a sharp rise in the exchange rate signifies a shortage of dollars; however, the recent weakness of the won is difficult to understand, given that the current account surplus has expanded this year due to record-breaking export growth driven by the semiconductor industry. According to the Bank of Korea, the current account surplus surged to approximately $102.7 billion from January to April due to a sharp increase in semiconductor exports, yet the exchange rate surpassed the 1,500 won mark, similar to levels seen during the Global Financial Crisis. Although the current account surplus continued to grow after May, the rate surged to 1,562 won during night trading on June 6 and recorded 1,547 won on June 9 based on the buying and selling rates. How, then, can this recent rise in the exchange rate be explained?

■ Overseas Stock Investment and External Creditor Nations

First, it must be noted that predicting exchange rate changes is extremely difficult due to the influence of various complex factors. There are numerous factors affecting the won exchange rate, including the interest rate differential between Korea and the U.S., liquidity growth rates, and economic growth rates, as well as fluctuations in the Japanese yen, investors' expectations regarding exchange rate changes, and foreign exchange supply and demand. Late last year, some argued that the exchange rate rose because Korea's broad money (M2) growth rate was higher than that of the United States. In response, the Bank of Korea countered that the M2 growth rate by international standards was not high and that Korea's inflation rate was lower than that of the U.S. Former Bank of Korea Governor Lee Chang-yong also pointed out that the increase in individual investors' investments in U.S. stocks, such as "Seohak Ants," fueled the rise in the exchange rate.

An interesting point is that, as shown in the figure below, the trend of the real exchange rate rising simultaneously with the expansion of the current account surplus has continued since 2023. A report released by the Bank of Korea last April points out that this phenomenon is related to structural changes in the external sector of the Korean economy. According to the report, since Korea transitioned into a "net external asset country" in 2014—where assets held abroad exceeded liabilities—the focus of external assets has rapidly shifted from reserve assets, such as the central bank's foreign exchange reserves, to private sector assets like overseas stocks. In the past, a significant portion of the current account surplus led to an increase in reserve assets, but since the mid-2010s, there has been a net outflow of capital in the form of overseas securities investments by domestic residents. Consequently, while the real exchange rate fell as the current account surplus expanded until 2015, it has steadily risen thereafter despite the surplus. In particular, since the second quarter of 2023, the current account surplus has expanded sharply, yet the upward trend in the real exchange rate has accelerated even further. Now, as private-sector-led overseas asset management has increased in the Korean economy, similar to other developed nations, overseas investment by Koreans has become important for exchange rates, and the adjustment mechanism between the current account balance and the exchange rate has weakened.

In fact, South Koreans' overseas securities investment is projected to reach approximately $140.3 billion in 2025, more than double the $67 billion recorded in 2024. The investment income balance, based on overseas investment, has also recorded a surplus since 2011 and is growing in importance within the current account. South Korea is exhibiting a trend similar to that of Japan in the past, as overseas investment returns have surpassed domestic returns since the mid-2000s, leading to an expansion of the proportion of overseas investment and increasing importance of its income. Meanwhile, according to a report published by the Bank of Korea in June , a 3% increase in overseas investment above the average level causes the dollar exchange rate to rise by about 0.7% due to increased demand for foreign exchange. The government recognized this issue and implemented a policy exempting capital gains tax for those who sell overseas stocks and invest in domestic stocks for the long term, but the effect has been minimal. Of course, while an increase in investment income, such as overseas dividends and interest earnings, exerts downward pressure on the dollar exchange rate, this effect is weakened if the funds are reinvested overseas. The Bank of Korea points out that, fundamentally, to reduce upward pressure on the exchange rate, domestic productivity and returns on investment must be increased to alleviate incentives for expanding overseas investment. Ultimately, this implies that structural exchange rate stability has limitations if achieved solely through foreign exchange market responses, and that the foundation for the repatriation of investment income must be expanded alongside the enhancement of domestic growth potential.

■ DRAM Dollar and Foreign Investors

However, the rise in Korea's exchange rate this year appears somewhat excessive. This is difficult to explain, considering that the current account surplus is at an all-time high and resident investment in overseas stocks has barely increased since February. A Financial Times article on May 28 described this phenomenon as a mystery. Since the beginning of the year, the Korean won has fallen by about 4% against the dollar, a significant decline even compared to other Asian countries.

The article pointed to two factors that have significantly impacted the recent supply and demand of foreign exchange as the cause. The first is the reality that Korean companies, which have achieved massive export performance in sectors such as semiconductors, are not bringing the dollars they earn back into the country to convert into Korean won. Leading domestic export conglomerates in sectors like semiconductors and automobiles already have an absolute majority of overseas sales and a high proportion of overseas production. Furthermore, since capital investment and material procurement are conducted in dollars, the dollars earned from exports are frequently spent abroad; consequently, they hold these dollars internally rather than converting them in the domestic spot market. Regarding this, a prominent overseas researcher even coined the term "DRam dollars," likening the dollar holdings of Korean semiconductor companies to the petrodollars of oil-producing nations. Additionally, foreign currency deposits held by Korean companies to hedge against exchange rate fluctuations have also increased significantly recently. The balance of dollar deposits at the five major commercial banks stood at approximately $54.4 billion on June 11, a substantial increase from about $46.2 billion at the end of March. On the 11th, the government held a meeting with major export companies, including Samsung Electronics and Hyundai-Kia Motors, to discuss measures for converting export proceeds and bringing overseas reserve funds into the country.

The second factor, which has recently been drawing attention domestically, is the selling of Korean stocks by foreign investors and the outflow of the proceeds. As shown in the table below, the Bank of Korea announced that foreign investors recorded a net outflow of $77.8 billion in stock investment funds from January to May of this year, including $31.8 billion in May. While the KOSPI index nearly doubled from the beginning of the year until June 19, foreign investors sold over 110 trillion won worth of domestic stocks during this period, with those funds flowing overseas. As is commonly said, this is due to foreign investors' rebalancing and profit-taking sales. For example, institutional investors such as foreign pension funds hold a certain percentage of their total assets in Korean stocks based on indices like the Morgan Stanley Capital International (MSCI). However, as the value of Korean stocks has risen significantly recently, exceeding their target ratios, they sold Korean stocks to meet the required ratio. As the figure below shows, stock prices and the value of the Korean won have been moving in opposite directions this year, particularly over the past few months.

■ Controversy over National Pension rebalancing

In particular, claims have been raised that this rebalancing by foreign investors was accelerated by changes in the National Pension Service's investment strategy. According to a Bloomberg report on June 12 , British investment bank Barclays argued that while the National Pension Service boosted KOSPI returns by suspending portfolio adjustments, it resulted in increased volatility. The argument is that the National Pension Service's failure to rebalance placed greater upward pressure on stock prices, thereby stimulating rebalancing by foreign investors. Indeed, the proportion of domestic stocks in the National Pension Service's assets rose due to the surge in stock prices, reaching approximately 21% at the end of March, 27.2% on May 26, and about 30% on June 19. Consequently, at the Fund Management Committee meeting on May 28, the National Pension Service raised the target weight of domestic stocks from the existing 14.9% to 20.8% and increased the allowable range for strategic asset allocation from 3 percentage points to 6 percentage points. The target weighting and allowable range were raised exceptionally in consideration of the negative impact that the National Pension Service's stock sales would have on the stock market. Additionally, last January, taking into account the high volatility in the domestic stock market, it was decided to defer rebalancing until the end of June in the event of a deviation from the strategic asset allocation allowable range. Nevertheless, as of the end of June, the weighting of the National Pension Service in domestic stocks exceeded the upper limit of 28.8%, which includes the tactical asset allocation allowable range, making rebalancing involving the sale of domestic stocks inevitable starting in July.

According to a Barclays report, while the National Pension Service's return on domestic stocks in the first quarter of this year was very high at approximately 22%, had the portfolio been rebalanced according to its original target weightings, it would have sold about 130 trillion won, resulting in a smaller rise in stock prices and a return of around 11%. In this scenario, the scale of rebalancing by foreign investors and net capital outflows would have decreased, thereby lowering upward pressure on the exchange rate. However, the government refuted this argument, stating that the causal relationship is weak and that exchange rates are influenced by various factors, including domestic and global macroeconomic conditions. Furthermore, even if the National Pension Service had rebalanced its domestic stock holdings, investing the proceeds from the sales overseas could have similarly exerted upward pressure on the exchange rate. However, considering that the National Pension Service recently raised its currency hedging limit to 15% and extended its $65 billion foreign exchange swap with the Bank of Korea, such pressure may have been somewhat limited. Above all, if the National Pension Service had sold domestic stocks and purchased more government bonds in accordance with its original target weighting, it could have alleviated upward pressure on the exchange rate and reduced the burden of rising market interest rates.

In any case, it is true that suspicions are being raised that the National Pension Service’s change in existing principles to increase its holdings of domestic stocks was one of the factors behind the recent rise in the exchange rate, and that this was related to political considerations aimed at boosting stock prices. Of course, the change in the National Pension Service’s investment strategy, intended to enhance returns, support the development of the capital market, and benefit future generations, is fully understandable; however, it would be desirable for the government and the National Pension Service to provide a clear explanation regarding these criticisms. In particular, the criticism that the National Pension Service played a role in amplifying instability rather than stabilizing the financial market should be taken to heart.

Many analysts predict that the won will gradually fall against the dollar, arguing that the exchange rate is currently too high relative to fundamentals and that the Bank of Korea is expected to raise interest rates. However, the reality that a high exchange rate exceeding 1,500 won per dollar has become a sort of "new normal" is causing difficulties for many citizens. While a high exchange rate may benefit large export companies, it raises the price of imports, thereby increasing inflation and negatively impacting real income, ultimately stagnating domestic demand. Given concerns that the high exchange rate could further deepen polarization within the Korean economy, it is time for in-depth discussion and policy responses to prevent structural depreciation of the won.

(This article was originally published as a column in Hankyoreh in Korean and translated into English with the help of Google Translate. The views expressed in this article are those of the author(s) and do not necessarily represent the official stance of the center.)