Semiconductors were hit hard again today, and it is probably no surprise that the Korean won continued to strengthen. The won appears to have become an important part of the semiconductor story we’ve witnessed over the past several months. Korean investment flows into the U.S. equity market have been extraordinary since April 2025, with cumulative holdings rising from around $200 billion to roughly $800 billion by June.

Since June 2025, the won has weakened considerably. During that same period, the semiconductor sector experienced a powerful rally. The inverse relationship has been striking, with a weaker won coinciding with increasingly strong gains in semiconductor stocks.

Rising Rates

One reason the semiconductor trade may be starting to unwind is that USD/KRW has declined to a less favorable level, reducing one of the tailwinds that coincided with the sector’s rally. At the same time, Korean policymakers appear increasingly uncomfortable with the won’s previous weakness. Unlike the Bank of Japan, the Bank of Korea has already begun tightening policy, raising its benchmark rate by 25 basis points on July 15. Markets expect another 25-basis-point hike in August and possibly one more before year-end, bringing the policy rate to around 3.25%.

Korea’s two-year government bond yield has risen to roughly 3.71%, while the 10-year yield has climbed above 4.3%. At the same time, the interest rate differential between the U.S. and Korea has narrowed significantly. As with any currency trade, when an interest-rate advantage that once heavily favored the dollar begins to disappear—and markets expect the Bank of Korea to continue raising rates aggressively over the next six months—the currency tends to adjust. In this case, the Korean won has strengthened against the dollar.

Korean Won Impacts

That creates a difficult environment for Korean investors who purchased U.S. assets on an unhedged basis. Not only are they facing losses from the dollar’s depreciation versus the won, but many of the same investments—particularly in the AI and semiconductor space—are also coming under pressure. The combination of adverse currency translation and declining asset prices can quickly turn what had been a highly profitable trade into a painful one.

In my view, if the Korean won continues to strengthen against the dollar, the AI trade is likely to continue unraveling. The currency tailwind that supported Korean investment in U.S. AI and semiconductor stocks has reversed, leaving investors exposed to both a stronger won and weakening equity prices.

-Mike

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Glossary by ChatGPT

Basis Point (bp): One one-hundredth of a percentage point (0.01%), commonly used to measure changes in interest rates and bond yields.
Benchmark Rate: The policy interest rate established by a central bank to influence borrowing costs and economic activity.
Currency Tailwind: A favorable exchange-rate movement that enhances investment returns.
Interest Rate Differential: The difference between interest rates in two countries, which can influence capital flows and exchange rates.
Policy Tightening: Central bank actions, such as raising interest rates, aimed at slowing economic activity and controlling inflation.
Unhedged Position: An investment that is exposed to fluctuations in foreign exchange rates because no currency protection has been put in place.
USD/KRW: The exchange rate measuring the value of the U.S. dollar relative to the South Korean won.

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This report contains independent commentary to be used for informational and educational purposes only. Michael Kramer is a member and investment adviser representative with Mott Capital Management. Mr. Kramer is not affiliated with this company and does not serve on the board of any related company that issued this stock. All opinions and analyses presented by Michael Kramer in this analysis or market report are solely Michael Kramer’s views. Readers should not treat any opinion, viewpoint, or prediction expressed by Michael Kramer as a specific solicitation or recommendation to buy or sell a particular security or follow a particular strategy. Michael Kramer’s analyses are based upon information and independent research that he considers reliable, but neither Michael Kramer nor Mott Capital Management guarantees its completeness or accuracy, and it should not be relied upon as such. Michael Kramer is not under any obligation to update or correct any information presented in his analyses. Mr. Kramer’s statements, guidance, and opinions are subject to change without notice. Past performance is not indicative of future results. Neither Michael Kramer nor Mott Capital Management guarantees any specific outcome or profit. You should be aware of the real risk of loss in following any strategy or investment commentary presented in this analysis. Strategies or investments discussed may fluctuate in price or value. Investments or strategies mentioned in this analysis may not be suitable for you. This material does not consider your particular investment objectives, financial situation, or needs and is not intended as a recommendation appropriate for you. You must make an independent decision regarding investments or strategies in this analysis. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Before acting on information in this analysis, you should consider whether it is suitable for your circumstances and strongly consider seeking advice from your own financial or investment adviser to determine the suitability of any investment.

Why the Korean Won Matters for AI and Semiconductor Stocks

Rising Rates

Korean Won Impacts

Glossary by ChatGPT

Disclosure