The Bank of Korea published an issue note examining how Korea’s rapid growth in overseas investment and the resulting investment income affect the KRW/USD exchange rate. The note finds a two-sided effect. Outward investment increases foreign exchange demand and tends to raise the KRW/USD rate, while income earned on accumulated external assets increases foreign exchange supply and tends to lower it. That offset is limited when earnings from direct investment are retained or reinvested abroad rather than repatriated, meaning a larger investment income surplus does not necessarily translate into stronger domestic foreign exchange supply or greater exchange rate stability. The analysis comes as Korea’s overseas investment has risen sharply, led by portfolio flows. In 2025, direct investment fell to USD 41.2 billion from USD 49.7 billion in 2024, while portfolio investment more than doubled to USD 140.3 billion from USD 67.0 billion, lifting the portfolio investment to GDP ratio to 7.5% from 3.6%. Using a Large Bayesian Vector Autoregression model, the note estimates that an overseas investment shock equal to about 3% above its average level raises the KRW/USD rate by about 0.7 percentage point, while an investment income shock equal to about 8% above average lowers it by about 0.4 percentage point. A 1 percentage point increase in the reinvestment ratio weakens that FX supply effect and raises the rate by about 0.4 percentage point. Cross-country comparisons with Japan, Germany and Taiwan are used to show that repatriation patterns and currency hedging materially shape how external income affects the exchange rate. The note says Korea’s monitoring framework for FX supply and demand should focus more closely on how much investment income is actually repatriated into the domestic FX market, rather than on headline income balances alone. It points in particular to tracking dividend remittances, reinvested earnings and hedging behavior, while also highlighting the role of stronger domestic productivity and investment returns in reducing structural incentives for further overseas investment.
Bank of Korea2026-07-16
Bank of Korea issue note finds overseas investment raises KRW/USD, while investment income lowers it unless retained abroad
The Bank of Korea published an issue note finding that Korea’s expanding overseas investment puts upward pressure on the KRW/USD rate, while higher investment income only partly offsets that effect. The note says the offset weakens when earnings are retained or reinvested abroad instead of being repatriated. It calls for FX monitoring to focus on actual repatriation, dividend flows and hedging rather than headline investment income alone.