with the recent volatility in global financial markets, interest in the dollar, a safe haven asset, has never been higher. the weakening of the Korean won and the rapid rise in the dollar's exchange rate have posed both a risk and a new opportunity for domestic investors. this report unravels the nature of the foreign exchange market, a central pillar of global finance, and provides an in-depth analysis of four key dollar investments available to retail investors. we also cover the recent market hot topic of yen carry trade liquidation risk and efficient tax saving strategies to help readers build a well-rounded wealth management strategy.
1. foreign Exchange Market The essence of FX and the characteristics of the OTC market
the foreign exchange market (FX) is the world's largest financial market where currencies are traded around the globe. Rather than gathering in a specific location to trade like a stock exchange, the market is an over-the-counter (OTC) market where financial institutions, central banks, corporations, and individual investors from around the world are connected via telecommunications networks to trade around the clock.
the forex market is characterized by overwhelming liquidity. the U.S. dollar intervenes in most transactions in this massive flow and serves as the vehicle currency. the value of all currencies is often measured against the dollar, a phenomenon that reflects the strength of the U.S. economy and the dollar's reserve currency status.
the fundamental reason retail investors need to understand the nature of the forex market is to understand how money flows. forex trading is more than just the act of making currency gains; it has a profound impact on a country's imports and exports, its creditworthiness, and the macroeconomy as a whole. so reading the movement of exchange rates is like predicting where global capital will go.
2. how to invest in dollars 1 The basics of foreign currency exchange and foreign currency deposits
the most recommended method for first-time currency investors is foreign currency exchange and foreign currency deposits, which have the advantage of being simple in structure and accessible.
mechanism and return structure of foreign currency exchange
foreign currency exchange is the most basic form of investment, where you buy dollars when the exchange rate is low, hold them, and sell them back when the exchange rate rises. the biggest advantage of this method is that you don't pay any taxes on the exchange rate gains. however, it's important to consider that holding physical banknotes puts you at risk of loss or theft, and the bank's conversion fee (the bid/ask spread) is relatively high.
the stability and benefits of foreign currency deposits
a foreign currency deposit involves opening a dedicated foreign currency account at a bank and depositing dollars. you can expect to earn a small amount of interest in addition to exchange rate gains, and it's very safe, with depositor protection of up to KRW 50 million per person when combined with your local currency deposits.
category foreign currency exchange (physical) foreign currency deposit (account) revenue Source exchange Profit exchange gain + interest on deposits tax (exchange gain) non-taxable non-taxable tax (interest) not applicable15.4% withholding
depositor protection not availableavailable (up to KRW 50 million)
fees cash conversion fees (high) telegraphic transfer fee (relatively low)foreign currency deposits are a very favorable tax saving method for high net worth individuals, as the exchange gain portion is excluded from the calculation of comprehensive taxation of financial income if the annual financial income exceeds KRW 20 million.
3. dollar Investing Method 2 Foreign Currency Denominated Assets Stocks Bonds ETFs MMFs
go beyond simply holding the currency itself and seek additional returns by investing in assets that trade in dollars. This is known as investing in foreign currency-denominated assets.
investing in foreign stocks and bonds
when you buy stocks listed on the Nasdaq or New York Stock Exchange in the United States directly with dollars, you're naturally investing in currency. this is because you get to take advantage of both the capital gains from rising stock prices and the currency gains from rising exchange rates.
for bond investing, you buy foreign currency-denominated bonds, such as U.S. Treasuries. in addition to the interest income generated by the bond, you can expect to benefit from currency fluctuations. A big benefit of investing in foreign bonds directly is that the capital gains and losses are currently tax-free.
the rise of dollar ETFs and MMFs
in recent years, there has been a surge in demand for dollar-denominated exchange traded funds (ETFs) and dollar-denominated money market funds (MMFs).
-
dollar ETFs: You can buy a dollar futures ETF listed on a domestic stock exchange in Korean won, or a dollar index ETF listed on a U.S. stock exchange in U.S. dollars. the advantage is that you can conveniently trade from your stock account without the need for currency conversion.
-
dollar MMFs and SOFR ETFs: These products track the U.S. risk-free rate (SOFR), which is the interest rate on short-term U.S. government bonds or collateralized debt obligations. in recent years, as interest rates in the U.S. have remained higher than in Korea, dollar MMFs have outperformed Korean won MMFs by about eight times.
leveraged investing available
SOFR ETF uS short-term interest rates exchange rate arbitrage + daily interest rate returnspopular for cash parking
dollar MMF u.S. short-term financial instrument exchange rate gains + management dividendswithdrawals available at any time
4. how to invest in the dollar 3 The world of currency derivatives and FX margin trading
more aggressive investors utilize currency derivatives. this is a way to maximize the leverage effect of making large trades with a small margin.
How FX margin trading works
FX margin trading involves speculating on the movement of the exchange rate between two currencies in order to profit from it. the basic trading unit is 100,000 units of the base currency, and a certain amount of margin must be deposited with a financial investment firm. it's a high-risk investment that can be highly profitable, but if your prediction is wrong, you could lose more than your initial investment.
requirements for trading futures and options
currency futures and options are transactions in which you fix or buy the right to choose the exchange rate at a specific point in time. in order for domestic retail investors to trade over-the-counter derivatives, they must meet strict eligibility requirements under the Capital Markets Act. a minimum of one hour of prior training and three hours of simulated trading is required, and a minimum deposit of KRW 10 million to KRW 20 million is required, depending on the type of product.
5. how to invest in the dollar 4 Carry trade strategies and global capital flows
carry trade is a strategy that involves borrowing funds in a currency with lower interest rates and investing in a currency with higher interest rates or high-yielding assets. it goes beyond simply capitalizing on currency fluctuations and uses the interest rate differential between countries as the basis for returns.
history and principles of the yen carry trade
the most classic example is the yen carry trade, which utilizes the Japanese yen. during Japan's prolonged period of zero or negative interest rates, investors have borrowed yen cheaply and invested in higher-yielding U.S. government bonds or stocks in emerging markets. in doing so, investors have been able to earn interest income from the interest rate differential, as well as exchange rate gains if the yen depreciates (yen depreciation).
while carry trades play an important role in providing global liquidity, they are also a double-edged sword, amplifying market volatility when the interest rate environment changes.
6. unwinding the yen carry trade and the lessons of Black Monday 2024
in early August 2024, global financial markets experienced a sharp sell-off that became known as Black Monday. The unwinding of the yen carry trade was one of the key contributors to this event.
what triggered the unwind
the interest rate differential between the US and Japan narrowed sharply after the Bank of Japan (BOJ) took a more hawkish stance than expected and raised interest rates, while expectations of a rate cut by the US Federal Reserve (Fed) grew. as the value of the yen began to surge, those who had invested in the cheap currency rushed to sell their assets and redeem their yen to avoid losses.
the butterfly effect on markets
in the process, money was pulled out of stock markets around the world, causing Japan's Nikkei index to plunge more than 12% in a single day, with South Korea's Kospi and major U.S. indices following suit. the amount of money that came under liquidation pressure was in the hundreds of billions of dollars, and it became a symbolic event that illustrated how changes in the foreign exchange market can bring down real asset markets.
7. tax and tax-saving strategies to consider when investing in currencies
successful dollar investing requires getting in the habit of calculating after-tax returns. that's because different investment vehicles are taxed differently.
a detailed comparison of taxation schemes by type
-
foreign currency physical and deposits: Exchange gains are fully tax-free. only deposit interest is subject to interest income tax at 15.4%.
-
foreign equity direct investment: You can deduct up to KRW 2.5 million per year in combined capital gains and exchange gains, with the excess subject to a 22% capital gains tax.
-
domestically listed dollar ETFs: Combine exchange gains and distributions and pay a 15.4% dividend income tax. these gains are included in the comprehensive taxation of financial income.
-
dollar insurance: The nature of the insurance product allows you to take advantage of tax-free exchange gains under certain conditions, with the added benefit of a guarantee.
take advantage of tax-advantaged accounts
to minimize your tax burden, a good strategy is to buy dollar-related ETFs within an ISA (Individual Self-Directed Account) or pension savings fund. ISA accounts offer tax-free and segregated taxation, while pension accounts allow you to defer taxes and pay them later at a lower rate of pension income tax (3.3-5.5%).
8. dollar exchange rate outlook and choosing a currency hedge UH strategy
one of the most common questions when investing in dollars is whether to hedge (H) or not, which should be determined by the outlook for the USD exchange rate in the future.
exchange exposure (UH) vs. exchange hedge (H)
an unhedged product is a straightforward reflection of exchange rate fluctuations. during periods of rising USD exchange rates, the appreciation in the value of the asset plus the exchange rate gain maximizes profits. exchange-rate hedged instruments, on the other hand, use derivative contracts to eliminate the risk of currency fluctuations. when the exchange rate is expected to fall, currency hedges are favorable, but when the interest rate differential between the US and South Korea is large, as it has been recently, hedging costs can eat into returns.
variables in the outlook for the Korean won exchange rate
the future exchange rate will be determined by the pace of interest rate cuts in the U.S., the performance of South Korea's exports, and global geopolitical risks. Products like U.S. money market ETFs, in particular, offer a stable interest rate return, so even if the exchange rate moves sideways or declines modestly, the defensive nature of the product can be offset by the interest rate return.
9. frequently Asked Questions
Q1. What is the best way to get started investing in dollars?
A1. If you're starting with a small amount, we recommend foreign currency deposits, which are easy to access and offer the benefit of tax-free exchange gains. if you are comfortable trading stocks, buying a dollar MMF or SOFR ETF through a brokerage account is also an efficient way to get started.
Q2. Can I invest in dollar ETFs in an ISA account?
A2. Yes, you can buy dollar futures ETFs or SOFR ETFs listed on domestic stock exchanges within an ISA account. this allows you to take advantage of dividend income tax savings.
Q3. Should I buy dollars now if the exchange rate has already risen so much?
A3. It is very difficult to predict the peak of the exchange rate, so rather than investing a large sum at once, your strategy should be to buy in increments to lower the average unit cost of your purchase. Also, the dollar is an insurance policy that appreciates in times of crisis, so it is advisable to maintain a certain weighting in your asset allocation.
Q4. Is there a chance that the yen carry trade liquidation will happen again?
A4. If interest rate policies in Japan and the US continue to move in opposite directions, we could see further liquidation pressure. while speculative positions have been largely unwound since the August 2024 event, structural funding remains and should be watched carefully as a source of volatility.
Q5. Is interest earned on foreign currency deposits tax-free?
A5. No, exchange gains are tax-free, but interest earned on deposits is subject to interest income tax at 15.4%.
10. conclusion and future asset allocation suggestions
investing in dollars is more than just a way to generate income; it's a key strategy to increase the stability of your personal portfolio. from basic currency translation through foreign currency deposits, to generating interest rate income through ETFs and MMFs, to understanding the carry trade to read global macroeconomic trends, investors need to choose the right tools to suit their appetite and objectives.
with global financial markets becoming more interconnected, there are always unexpected variables, such as a yen rate hike leading to a crash in the South Korean stock market, so a three-dimensional approach is needed, including taking advantage of tax-advantaged accounts to maximize tax benefits and considering the profitability of the asset itself (interest rates, dividends, etc.) rather than betting on the direction of the exchange rate alone.
key takeaway: Investing in dollars can range from tax-advantaged savings to high-yield ETFs, and you should allocate your assets strategically, keeping an eye on global interest rate differentials and carry trade trends.
we hope this report helps you on your path to currency success. if you enjoyed it, please show your support by commenting and subscribing to our regular newsletter for the latest forex market insights.