SK Hynix’s massive dollar funding secured through its U.S. Nasdaq listing has emerged as a key variable pulling down the soaring KRW/USD exchange rate. The $26.5 billion (approximately 39.7 trillion won) in proceeds exceeds the emergency liquidity supplied during the historic Korea-U.S. currency swap, fueling market expectations of a “swap-level” dollar bomb being dropped on the foreign exchange market.
According to industry and financial sector sources on the 12th, SK Hynix successfully raised approximately $26.5 billion through an American Depositary Receipt (ADR) issuance on the 10th (local time). The payment is scheduled to be finalized on the 14th when the offering process concludes. The company plans to allocate these funds primarily to domestic capital expenditures, including the construction of the Yongin Semiconductor Cluster, expansion of the Cheongju P&T7 advanced packaging plant, and procurement of extreme ultraviolet (EUV) lithography equipment from the Netherlands’ ASML. Since building factories in South Korea and paying partner companies and labor costs requires won, a large-scale conversion of the dollar funds raised in the U.S. is unavoidable.
The scale of the incoming dollars exceeds market expectations. During the COVID-19 pandemic in 2020, the total amount of dollars actually supplied to South Korea under the $60 billion currency swap agreement between the Bank of Korea and the U.S. Federal Reserve was $19.872 billion. The $26.5 billion that private company SK Hynix is bringing in through this listing significantly surpasses that emergency liquidity supply. The amount is also close to 73% of South Korea’s entire trade surplus for June (approximately $36.2 billion) and is comparable to the average daily trading volume of the KRW/USD spot market in the first quarter of this year (approximately $33.28 billion), as reported by the Bank of Korea. It is a staggering sum, double the amount of dollars (approximately $13.6 billion) that foreign exchange authorities net sold in the market during the first quarter to defend the exchange rate.
The anticipation of massive dollar selling and won buying is already exerting strong downward pressure on the market, even before the actual conversion takes place. This is because the foreign exchange market preemptively reflects expectations of future fund inflows. The supply landscape shifted as companies sold forward exchange contracts to hedge currency risk, and banks responded by selling dollars in the spot market. This was compounded by portfolio adjustments from investors who had preemptively bought dollars expecting a rate increase, as well as early conversion by exporters, causing the exchange rate to plummet.
Indeed, the KRW/USD rate experienced a rollercoaster ride. Earlier this month, a combination of yen weakness and foreign sell-offs pushed the rate to just under the 1,560 won mark intraday, a record high since the global financial crisis. However, it plunged by more than 30 won in a single day on the 3rd, and by the 8th, it had fallen below the 1,500 won level on a closing basis. On the 10th, it closed at 1,501.4 won, a drop of over 50 won from its peak in just a few days. While a pause in the global dollar’s strength played a role, foreign exchange market experts interpret this as a result of preemptive pricing of the expected inflow from SK Hynix’s ADR listing.
An SK Hynix official stated, “The funds raised through the ADR will be used for the investments disclosed in the securities registration statement, and a portion is planned to be converted into won for execution,” but added that “the scale and timing of the conversion have not yet been finalized.”
However, not all of the $26.5 billion is expected to be converted into won in the domestic foreign exchange market. Payments for high-cost equipment that must be imported from overseas, such as ASML’s EUV lithography machines from the Netherlands, raw material purchases, and foreign currency debt repayments are highly likely to be settled directly in dollars. Furthermore, to minimize market impact, the funds will likely be sold in tranches according to the investment schedule rather than converted all at once. The financial sector anticipates that trading will begin in earnest after the offering proceeds are paid on the 14th, with conversion operations continuing for several months from late July through August and September. Kwon Ah-min, an analyst at NH Investment & Securities, noted, “Conversion is expected to start from mid-to-late this month,” and analyzed that “as a plan to convert in daily tranches of about $1 billion is being discussed, the actual dollar supply effect could extend into August and September.”
This is fostering expectations that the inflow will act as a long-term defense wall, strongly capping the upside and limiting sharp spikes rather than causing the exchange rate to crash overnight. While SK Hynix converts dollars into won, it can ease the burden of dollar supply in the market and serve as a buffer preventing the rate from surging. A foreign exchange dealer at a commercial bank diagnosed, “The dollar supply from SK Hynix could serve as a factor that lowers the ceiling for the KRW/USD rate and prevents sharp increases. While the actual scale and timing of the conversion are not confirmed, it will certainly help in stabilizing the exchange rate that has been on a high-altitude trajectory.”
However, cautious views also suggest that if expectations of SK Hynix’s dollar supply are already largely reflected in the current exchange rate, the additional downside after the offering proceeds arrive could be limited. The exchange rate could rebound at any time if U.S. interest rates rise again or global financial market instability grows, and structural factors that continuously create dollar demand domestically, such as increased overseas investment by the National Pension Service and retail investors, still persist.
finance.biggo.com