Use the SK hynix effect to build reserves

American depositary receipts (ADR) issued by SK hynix debuted successfully on the Nasdaq market last week. Investors valued the offering above the company’s share price in Korea, enabling the chipmaker to raise a total of $26.5 billion in the United States. It was reportedly the largest stock offering by a foreign company in U.S. market history, underscoring the elevated status Korean firms now enjoy.

SK hynix’s Nasdaq listing is also expected to ease pressure on Korea’s foreign exchange market, which has struggled with a strong dollar and rising overseas investment by domestic investors. Most of the money raised through the ADR issuance is expected to be spent on investments in Korea. As a result, market observers anticipate an influx of dollars on a scale comparable to a currency swap arrangement.

During the economic turmoil triggered by the coronavirus pandemic in 2020, Korea secured a $60 billion currency swap agreement with the U.S. Federal Reserve. Of that amount, however, only $19.87 billion was actually supplied to the domestic market. The $26.5 billion raised by SK hynix exceeds that figure. It is also nearly double the $13.6 billion that Korean monetary authorities sold net in the foreign exchange market during the first quarter of this year to defend the won.

Expectations of a wave of dollar inflows have already affected the market. Last week, the won-dollar exchange rate fell into the 1,400-won range.

The stability generated by SK hynix should be used as an opportunity to rebuild Korea’s foreign exchange reserves, which stood at $427.36 billion at the end of June. Korea ranked ninth in the world in foreign reserves as recently as December of last year, but by the end of May it had fallen to 13th place.

The decline reflects repeated market intervention aimed at curbing sharp increases in the exchange rate. As reserves dwindled, investors increasingly came to believe that the authorities lacked the resources to intervene aggressively, weakening the market’s caution toward official action.

When exchange rates are high, purchasing dollars in the market is costly. But if the won continues to stabilize, authorities may need to conduct smoothing operations to cushion the impact of a sharp appreciation fueled by SK hynix’s dollar inflows.

Moreover, Korea’s foreign exchange market began operating on a 24-hour weekday basis last week. To minimize shocks in this new environment, the country must strengthen the protective barrier provided by its foreign reserves.

The opportunity that SK hynix has presented to Korea’s foreign exchange market should not be squandered.