U.S. stock investors have reason to pay attention to the currency market for signs of how money may be flowing in and out of chip stocks
There's a danger sign for chip stocks, coming out of South Korea.
Investors in semiconductor stocks may not pay much attention to the currency markets, but recent developments for outside the U.S. borders are warning that's exactly what they should be doing.
The South Korean won has appreciated notably against the U.S. dollar over the past several weeks as the Bank of Korea has begun raising interest rates.
Ordinarily, a move in the dollar-won rate (USDKRW) might not attract much attention from investors in the U.S. stock market. But with the PHLX Semiconductor Sector Index SOX already down roughly 20% from its June peak, the decline in dollar-won could signal a shift in the flow of money out of South Korea that had previously helped fuel the artificial-intelligence trade in U.S. markets.
If those flows continue to fade, semiconductor stocks may also have further to fall.
A rising dollar-won exchange rate, which indicates a weakening Korean won, had closely tracked the rally in chip stocks over the first half of the year. But then both dollar-won and the semiconductor sector peaked at roughly the same time.
Since then, as the chart below shows, dollar-won has fallen materially. The semiconductor index has also declined sharply, and failed to rebound even as the S&P 500 index SPX recovered most of its losses.
A surge in foreign investment
Mechanically, the relationship between a rising dollar-won rate and the semiconductor rally makes sense. Korean investors seeking exposure to U.S. semiconductor stocks need to sell the won and buy the dollar, putting upward pressure on dollar-won.
The SOX and the dollar-won rate peaked at the same time.
At the same time U.S. chip stocks were surging, South Korea's Kospi KR:180721, the country's benchmark stock-market tracker, also rose sharply. That was driven by the country's own AI-related companies, most notably Samsung Electronics (KR:005930) and SK Hynix (SKHY) (KR:000660), with the latter recently listing its stock on the U.S. market.
That move wasn't just coincidence, as data showed that there was a surge in South Korean investment in U.S. equities since March 2025.
According to Macrobond, cumulative holdings rose from approximately 300 trillion won, or about $190 billion, to 1,220 trillion won, or nearly $800 billion, by June 2026. That represents an increase of more than fourfold.
By July, however, those holdings had fallen to approximately 975 trillion won, or about $675 billion, a decline of roughly 20% from the June peak. The dollar-won rate then fell from approximately 1,442 at the end of July to 1,345 as of Sept. 4, a decline of nearly 7%.
Potential trigger event
One possible explanation is that the Bank of Korea's mid-July interest rate hike, along with signals that further tightening was likely, prompted investors to adjust their currency exposure. Rising rates in South Korea make owning the won more attractive.
The central bank then raised rates again in late August. As dollar-won declined and the U.S. chip sector weakened, that suggested South Korean investors may have also reduced their U.S. equity exposure as they brought their money back home. That process would require selling dollars and buying won, putting additional downward pressure on the dollar-won rate.
The SOX vs. South Korean foreign investment
The decline in dollar-won may represent more than a shift in foreign-exchange markets and central-bank policy. It may also be connected to a reversal in the capital flows that helped fuel the semiconductor and AI trade following the market's March selloff.
As dollar-won and chip stocks rose, the Cboe Semiconductor ETF Volatility Index also moved higher. The volatility index then declined as dollar-won and semiconductor stocks reversed course. That suggests some of the demand driving the semiconductor trade may have been expressed through the options market.
When implied volatility rises alongside the underlying stock or index, it can indicate strong demand for call options, which provide the right to buy, and upside exposure.
Dollar-won rate vs. Cboe Semiconductor ETF Volatility Index
Potential for headwinds
Since implied volatility peaked, the chip sector has continued to struggle. This may be a sign that investor demand for upside calls has faded and that the pace of new capital entering the trade has slowed. Volatility is a key component in the pricing of options, as it determines how likely an option will be exercised, depending on the time to expiration.
The foreign exchange market may therefore provide more than a signal about changes in economic growth and monetary policy. At times, it may also serve as an important indicator of global liquidity flows.
Only in hindsight will we know whether foreign capital helped drive the semiconductor surge this spring and summer. If it did, expectations for a strong rebound this fall may not materialize.
More concerning, additional positioning may still need to unwind, potentially pushing the sector even lower.
Michael Kramer is the founder of Mott Capital Management and a long-only investor focused on macro themes. He analyzes long-term macro trends and short-term market risk using technical analysis, fundamentals and options-market positioning.
-Michael Kramer
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