Hedge funds are stepping up strategic plays on the South Korean won, positioning for a rally akin to the Taiwan dollar’s sharp appreciation against the US dollar this month, according to a report by Bloomberg.
Options market activity in the dollar-won pair has surged, with trading volumes hitting year-to-date highs last week, according to DTCC data. Market participants attribute the uptick to speculation surrounding recent US-Korea currency discussions, with Barclays noting a marked increase in put option demand from macro-driven hedge funds.
The won is increasingly seen as the next Asian currency candidate to benefit from US dollar weakness, following the Taiwan dollar’s 7% rally. Korea’s expanding trade surplus with the US, combined with its place on Washington’s FX monitoring list, is driving expectations that policymakers may tolerate a stronger currency.
A key question “most hedge funds have been asking is: which currency pair can have the same magnitude of move that was observed in” the Taiwan dollar, said Mukund Daga, Head of FX options for Asia at Barclays in Singapore. “This has led to decent demand for dollar-won put options in digital and vanilla formats by fast-money names.”
Vanilla options offer standard exposure, while digital contracts provide binary payoffs upon hitting specific levels. Hedge fund flows have increasingly tilted toward the former, with DTCC data showing dollar-won puts with notional sizes exceeding $60m outpacing calls by a 3:2 margin on Wednesday.
Risk reversals – used to gauge sentiment via the premium for downside protection – are flashing strong bearish signals. One-month skew levels touched a 21-year high last week, reflecting the elevated cost of hedging dollar weakness relative to upside risk.
Investors are also reading tariff rhetoric from Washington as a softening stance on dollar strength. That narrative is turning the won into a popular proxy for broader shifts in US-Asia trade policy and a hedge against greenback depreciation.
Local reports last week citing a US view that Korea’s weak currency underpins its trade advantage provided fresh momentum for the won. While Korea’s finance ministry confirmed that FX consultations are ongoing, it emphasised that no formal conclusions have been reached.
Meanwhile, the Taiwan dollar’s rally has raised hedging costs for its life insurers – among the region’s largest dollar asset holders – prompting a pivot toward the won as a preferred hedge, according to BofA Global Research.
