The article discusses the increase in the volume of dollar-based repurchase agreements (RPs), which have reached a record high. These financial products, offered by securities firms, involve selling bonds to investors with an agreement to repurchase them, providing investors with interest paid in dollars. This surge is attributed to investors’ expectations of a rising exchange rate and their strategy to leverage short-term opportunities for currency gains.
As of the end of December last year, the outstanding balance of dollar RPs was recorded at $22.1 billion, showing a significant increase from $11.9 billion at the end of 2022. This rise is linked to the growing interest in overseas stock investments and the anticipation of a stronger dollar against the Korean won.
Dollar RPs are short-term products, and their interest rates are usually tied to U.S. short-term interest rates. Currently, major securities firms are offering rates ranging from 3.2% to 3.5%. Due to the chances of further exchange rate escalation, investors are opting to keep their funds in dollar RPs instead of converting them into won, allowing them to earn interest and gain from any future currency appreciation.
The article also notes a recent sharp decline in the won-dollar exchange rate, which later rebounded, underscoring volatile market conditions. The increase in foreign currency deposits, as observed in December, highlights an inclination to hold dollars amid these fluctuating circumstances. Simultaneously, local banks have been reducing their foreign currency deposit rates following interventions by financial authorities to curb dollar hoarding. Despite these efforts, it remains uncertain whether this will have the desired effect.