When the Won Weakens, Why Do Foreigners Sell Stocks?

You've probably seen headlines like this: "As the exchange rate climbed, foreigners dumped stocks." But what does the exchange rate have to do with stocks? It's confusing at first. Today, we'll break down that connection in the simplest way possible.

First, what does it mean for the exchange rate to go up?

The exchange rate is basically the price of one dollar. For example, if the rate is 1,300 won, it costs 1,300 won to buy one dollar.

If the rate rises from 1,300 won to 1,400 won, you now need more won to buy that same one dollar. In other words, the won has lost value. We call this a "weak won."

Foreigners have to "exchange currency" when they buy stocks

Here's the key part. Foreign investors hold dollars. To buy Korean stocks, they first have to convert their dollars into won (currency exchange). Only then can they buy our stocks with won.

And later, when they sell those stocks, they convert the won they received back into dollars and take it home. So for foreigners, it's not just the stock price that matters — the exchange rate matters just as much. They're exchanging money twice.

The trap of currency exchange gains and losses

Let's look at an example. Say a foreign investor bought 13 million won worth of stock when the rate was 1,300 won. Converted into dollars, that's 10,000 dollars.

Now let's say time passes and the stock price stays exactly the same. The stock is still worth 13 million won. But the exchange rate has risen to 1,400 won. If you now convert 13 million won back into dollars, you only get about 9,285 dollars.

The stock price didn't drop at all, yet because of the exchange rate, they lost about 700 dollars in dollar terms. This is what we call a currency exchange loss.

That's why they sell when the exchange rate goes up

Here's the summary. If it looks like the exchange rate will rise further, foreigners try to sell their stocks and convert to dollars before their losses grow. When this kind of selling piles up all at once, stock prices can swing.

On top of that, when foreigners sell stocks and convert to dollars, demand to buy dollars in the market goes up. That pushes the exchange rate even higher, which can lead foreigners to sell even more. It can start to look like a vicious cycle.

So how should we look at this?

The exchange rate is a clue for reading the flow of foreign money — money coming in and going out. That said, you can't judge the whole market by the exchange rate alone. Interest rates, the economy, corporate earnings, and more all move together.

Let's recap the key points one more time. Foreigners exchange their money twice. So when the won weakens, they can lose money even if the stock price stays the same — and that's why they sell when the exchange rate rises. Remembering just this one line is enough.