Wall Street rises as materials and crypto stocks offset continued bond sell-off
Investing.com-- South Korea’s won weakened sharply even as the country’s stock market staged one of the world’s biggest rallies this year, a divergence BofA Global Research said was driven by record foreign equity outflows and rising currency-hedging demand.
The KOSPI rallied more than 100% since the start of 2026, led by Samsung Electronics and SK Hynix, which gained around 185% and 284% respectively, BofA strategists said in a note. Despite that, the won fell to its weakest level against the dollar since 2009, with the USDKRW pair briefly touching 1,560 on June 5.
Get more key insights on South Korea’s AI stock boom by subscribing to InvestingPro
Foreign institutional investors net sold $78 billion of Korean stocks so far this year, with selling concentrated in March and from early May onward, mostly in the electrical and electronics equipment sector, the bank said. That outflow dwarfed Korea’s $27 billion trade surplus in May, even though exports grew more than 50% year-on-year.
BofA said the divergence reflected a four-step process: an initial volatility shock from the Iran war that forced foreign investors to trim Korean equity exposure, a subsequent surge in FX-hedging demand, a slowdown in domestic repatriation flows, and a self-reinforcing loop between won weakness and KOSPI strength.
As of end-May, foreign investors held about 2,774 trillion won, or $1.84 trillion, in Korean equities. A 10% hedge ratio on incremental exposure from a 10% KOSPI rise could generate roughly $18 billion of dollar buying, the bank estimated.
South Korean households have shown tentative signs of repatriating overseas investments, helped by a tax-incentive scheme launched by policymakers, though BofA said the scale remained modest.
The bank’s currency model showed the won was the most undervalued currency in emerging Asia relative to fundamentals. It said breaking the cycle would likely require central bank intervention, increased hedging by the National Pension Service, stronger exporter dollar conversion, or rate hikes to attract carry inflows.
The Bank of Korea was seen considering raising interest rates later this year, especially amid the energy price shock from the Middle East war. Sticky domestic inflation– spurred by the memory chip windfall and a persistently weak won– is also expected to push the BOK towards raising rates.
