When the Fed Cuts Rates, Where Does the Money Go? — How Korea and Taiwan Became the Core of Global Capital Flows

Part 1 – 1

① Background and Mechanism

When the U.S. Federal Reserve (the Fed) cuts its benchmark rate, yields on U.S. bonds and deposits decline, which typically softens dollar strength. In fact, reports indicate that in 2025 the dollar index has fallen roughly 10 percent against major currencies.

In summary, rate cuts can channel global liquidity toward emerging markets through the following mechanism:

Lower U.S. rates reduce the expected return on U.S. fixed-income assets.

Investors, seeking higher yields, are incentivized to shift capital into emerging-market assets such as equities and sovereign bonds.

A weaker dollar boosts competitiveness for export-driven emerging economies, making them more attractive entry points for foreign investors.

UBS noted that “when the Fed cuts rates and the dollar turns weaker, Asia and emerging markets tend to benefit disproportionately.”

Stronger local currencies also lower import costs and improve investment conditions for emerging economies, further enhancing their appeal to global investors.

When these dynamics converge, conditions are ripe for an expansion of capital inflows into emerging markets.

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Part 1 – 2

② Recent Trends and Data

As the Fed signaled a full-scale easing cycle in the second half of 2025, global capital flows began to shift noticeably.

According to EPFR Global, emerging-market equity funds recorded weekly inflows of $7.6 billion during the peak of rate-cut expectations — the largest single-week gain of the year.

A separate September 17 report confirmed that emerging-market equity funds hit their highest inflow level of 2025.

From a macro perspective, several concurrent trends explain this renewed concentration of funds:

Falling U.S. bond yields fueled expectations of a weaker dollar.

Optimism toward emerging-market equities and bonds resurfaced. For example, recent reports show EM equities up about 27 percent YTD, markedly outperforming developed markets.

Analysts such as Schroders observed that in Q3 2025, the combination of Fed rate cuts and dollar weakness “proved decisively favorable for emerging markets.”

Nonetheless, institutions like the Asian Development Bank cautioned that portfolio inflows remain volatile and subject to policy, currency, and geopolitical shocks.

Thus, the simultaneous forces of rate-cut anticipation + dollar weakness + renewed EM growth momentum have together elevated “emerging-market capital inflows” to a key global-market theme.

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③ Why Technology-Exporting Nations — Korea and Taiwan — Stand Out

The real differentiator is the combination of export-driven structure and technological competitiveness.

Capital does not flow evenly across all emerging markets; it targets those occupying vital nodes in the global supply chain.

Korea and Taiwan sit at the center of global semiconductor, display, and AI-infrastructure exports.

When expectations of dollar weakness rise, these countries’ exporters gain a comparative edge, making their markets especially attractive to international investors.

UBS emphasized that “in a downward-dollar phase, Asian emerging markets — notably Korea and Taiwan — are well positioned to outperform.”

EPFR data likewise show that inflows into EM funds coincided with surging performance of technology-heavy markets.

Hence, within the flow of “rate cuts → weaker dollar → capital rotation,” tech-exporting economies such as Korea and Taiwan emerge as the primary beneficiaries.

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④ Key Variables to Watch

Rate cuts do not automatically guarantee inflows. Several offsetting factors can intervene:

Currency Risk: excessive appreciation can squeeze exporters’ profit margins. Strong inflows → stronger local currency → weaker export earnings — a classic feedback loop documented in multiple studies.

Export Demand & Industrial Structure: even export-led economies lose appeal if global demand slows or supply-chain shocks occur.

Geopolitical and Policy Risk: trade frictions, tech sanctions, and policy uncertainty can disrupt flows.

Central-Bank Response: if domestic authorities fail to manage inflow-driven currency strength, the cycle can reverse suddenly — the so-called “sudden stop” phenomenon in economics.

Investors, therefore, should look beyond the simplistic formula of “Fed cut = EM boom” and evaluate each nation’s currency dynamics, export mix, and policy agility in tandem.

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This first part outlined how Fed rate cuts facilitate capital inflows into emerging markets, recent supporting data, why Korea and Taiwan hold structural advantages, and which variables could distort the cycle.

Part 2 will dive deeper into exchange-rate behavior and capital-flow patterns in Korea and Taiwan, backed by specific numbers and case studies.

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Part 2. Korea and Taiwan — Exchange-Rate Dynamics, Capital Flows, and Investor Checklist

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1️⃣ Republic of Korea — Capital Inflows and the Currency Dilemma

Foreign buying in Korean equities has risen sharply in 2025.

According to the Korea Exchange, net foreign purchases in September totaled about ₩7 trillion ($5.1 billion) — more than triple last year’s figure.

This came barely two weeks after the Fed’s first rate cut, highlighting how swiftly global investors re-rated Korean assets.

▪ Exchange-Rate Trend

Fed easing pressures the dollar lower.

The DXY index fell roughly 9.6 percent YTD by mid-October 2025 (Refinitiv data).

The won strengthened correspondingly: from an August average near ₩1,350 per USD to around ₩1,280 by late October.

While such appreciation boosts foreigners’ notional returns, it compresses exporters’ profit margins.

▪ Corporate Impact

Samsung Electronics and SK Hynix earn more than 80 percent of revenue in U.S. dollars.

A 5 percent rise in the won typically trims operating profit by 2–3 percent.

When the won strengthened to ₩1,100 in 2022, Samsung’s quarterly margin slipped from 16 to 13 percent — a precedent investors still recall.

▪ Why Capital Keeps Flowing In

A weaker dollar makes Korean valuations look cheap.

The KOSPI semiconductor sector trades at ~10× forward PER, versus 23–27× for comparable U.S. names.

Global fund managers view this as a catch-up opportunity, especially as AI-memory demand surges.

Under the Fed’s easing cycle, Korean semis are being reclassified not as “emerging-market plays” but as core global holdings.

▪ Rate Cuts → Stronger Won → More Inflows

Unlike prior cycles (2019–2020), today’s stronger won actually accelerates inflows:

foreigners buy Korean assets expecting both capital gains and FX appreciation, creating a self-reinforcing loop that further strengthens the currency.

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2️⃣ Republic of China (Taiwan) — The AI Export Wave

The Taiwan Stock Exchange reports that in September 2025, foreign investors bought $6.59 billion net — the largest monthly inflow on record.

▪ Explosive Export Recovery

According to Taiwan’s Ministry of Finance, August exports hit $58.5 billion, up 34 percent year-on-year — the strongest growth since 2022.

AI semiconductors and high-performance computing chips (3-nm nodes) led the surge.

TSMC’s Q3 revenue reached $21.1 billion (+32 % YoY), a record high.

For investors, the mix of weaker USD + visible growth + AI boom proved a perfect entry setup.

▪ Taiwan Dollar (TWD) Strength

Central-bank data show the TWD appreciating from 32.5 → 31.0 per USD (≈ +4.6 %) between July and October 2025.

While that squeezed exporters, it offered foreign investors both FX and equity gains.

Goldman Sachs commented that a sustained dollar down-trend “could prompt a valuation re-rating of the Taiwan market.”

▪ Market Reaction

The TAIEX index was up 27 percent YTD by October 2025,

with its top-five constituents (TSMC, MediaTek, Foxconn, ASE, UMC) accounting for 65 percent of the total gain — a pattern mirroring Korea’s semiconductor-led rally.

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3️⃣ Investor Checklist — A Practical Guide

1. Confirm the Rate-Cut Signal

– Watch FOMC minutes, employment, and CPI data for signs of sustained easing.

– The sequence typically runs: falling U.S. yields → weaker USD → stronger EM currencies.

2. Track the Dollar Index and FX Flows

– Dollar-weak phases lift EM currencies; investors gain FX upside, while exporters lose margin.

3. Assess Structural Strength

– Korea: HBM, NAND, EV batteries.

– Taiwan: foundry, AI edge chips.

– Fed easing → AI capex boom → direct benefit to these chains.

4. Recognize FX Risk

– Won or TWD appreciation compresses export profits; use FX-hedged ETFs or forwards where appropriate.

5. Monitor Policy and Geopolitical Uncertainty

– U.S.–China tech tensions, IRA subsidy changes, and Taiwan Strait risks remain potential volatility triggers.

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4️⃣ Connecting the Story

As the rate-cut cycle unfolds, capital seeks markets combining growth potential and structural competitiveness.

Korea and Taiwan epitomize this dual profile.

Korea anchors the global AI-memory supply chain, powering the data-center investment boom,

while Taiwan, centered on TSMC, remains the hub of AI chip fabrication.

When Fed easing evolves from a short-term risk-asset rally into a structural reallocation of capital,

their currencies, export policies, and technological edges will likely redefine them as core markets, not peripheral EM plays.

Investors should avoid reducing the narrative to “weak dollar = EM rally.”

Sustainable returns depend on balancing FX risk, earnings durability, and policy clarity — the very mix that will determine who wins in the post-2026 global cycle.

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Part 3. Korea & Taiwan Corporate Case Studies — Who Thrives in a Rate-Cut Cycle?

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1️⃣ Korea — Semiconductors and EV Batteries: First Destination for Global Capital

The late-2025 surge of foreign inflows into Korea reflects not mere “rate-cut optimism” but alignment between export structure and technological competitiveness.

Rather than lifting all EM boats, easing now funnels liquidity into high-tech exporters capable of absorbing it productively.

(1) Samsung Electronics — Barometer of FX and Exports

In Aug–Sep 2025, Samsung Electronics was the most heavily bought Korean stock by foreign investors.

According to KSD, net foreign purchases in September reached ₩2.4 trillion (~ $1.7 billion), triple the previous month.

This coincided precisely with the Fed’s dovish pivot — the first wave of returning global capital.

As the won strengthened, investors bet not on lost export pricing but on earnings recovery momentum.

Samsung’s semiconductor division posted a +370 percent YoY operating-profit rebound in Q3 2025, driven by HBM3E shipments and foundry margins.

Samsung thus serves as a real-time “market thermometer,” reflecting shifts in both FX and global growth expectations.

(2) SK Hynix — Concentration of AI-Memory Liquidity

With AI data-center construction booming, Hynix’s HBM exports exploded.

TrendForce (Oct 2025) estimates global HBM market shares: Hynix 55 %, Samsung 35 %, Micron 10 %.

Accelerated HBM4 production (pulled forward to 2026) prompted foreign re-rating of Hynix as a core AI-supply-chain play.

Among KOSPI 200 constituents, Hynix was the only one whose foreign ownership rose for two straight quarters — a sign of strategic allocation, not speculative flow.

(3) LG Energy Solution — IRA Tailwind vs. FX Headwind

Despite adjustments to EV subsidy policies, LG Energy Solution (LGES) keeps expanding in North America.

Its Arizona plant’s Phase 1 line ran at 75 % utilization in Q2 2025, boosting output 42 % YoY.

Yet a weaker dollar means lower USD revenue when translated to won and potential FX losses.

Institutions have raised hedge ratios to 30–35 % to mitigate this risk.

Thus, “rate cuts → weaker USD → stronger won → tighter margins” has become a new cycle to watch.

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2️⃣ Taiwan — TSMC and the AI-Supply-Chain Magnet

Taiwan has posted the strongest capital inflows among emerging markets in 2025.

TWSE data show $6.59 billion in net foreign buying during September, up 40 % month-over-month — the largest since 2019.

(1) TSMC — Hub of the Global Semiconductor Ecosystem

Post-Fed cut, AI-chip demand spiked.

TSMC’s 7-nm and 3-nm lines ran at 95 % utilization, vs. 82 % during the 2023 AI boom.

Q3 2025 revenue hit $21.1 billion (+32 % YoY) — a record.

Major clients (NVIDIA, AMD, Apple) placed heavy orders, turning TSMC into the go-to “liquidity shelter” for global funds.

(2) MediaTek — The Rising AI-Edge Champion

Alongside TSMC, MediaTek became a key driver of inflows.

Its Q2 2025 revenue reached $13.1 billion (+18 % YoY), the fastest growth among EM semiconductor firms.

AI-edge chips now power OpenAI and Microsoft partner devices, establishing MediaTek as a pillar of the AI-edge ecosystem.

Foreign ownership rose 2.1 percentage points in H1 2025.

(3) Managed FX Policy and Market Performance

While TWD appreciation pressured exporters, the central bank capped volatility within 3.5 %, balancing inflows and competitiveness.

By September 2025, the TAIEX had gained 27 % YTD, beating the MSCI World’s 16 %.

3️⃣ The Temperature of Flows — Korea vs. Taiwan in Words

By September 2025, foreign capital was flowing strongly into both Korea and Taiwan, though Taiwan’s inflows were somewhat larger: roughly $5.11 billion into Korea versus $6.59 billion into Taiwan.

In terms of positioning, foreign ownership rose +2.8 percentage points in Korea and +3.4 percentage points in Taiwan year-to-date, indicating steady broad-based buying, with Taiwan’s tech-led export boom pulling slightly ahead in pace.

Index performance tells a similar story: MSCI Korea up about +22% YTD and MSCI Taiwan up about +27% YTD. The combination of Fed rate cuts and a weaker dollar reinforced capital rotation toward Asia’s technology exporters.

FX trends also line up: the Korean won appreciated about 5% versus the dollar, while the Taiwan dollar (TWD) strengthened about 3.8%. That FX strength narrowed exporters’ translation gains, but for foreign investors it added an extra layer of expected total return, further encouraging inflows.

Structurally, Korea’s core engines are HBM (high-bandwidth memory), NAND, and EV batteries, whereas Taiwan’s are foundry services and AI edge chips.

Ultimately, investors recalibrate based on “where growth is higher and policy visibility is better.”

Korea is being valued as a high–value-added AI-memory belt,

while Taiwan is recognized for its dual engines of leading-edge foundry + AI edge semiconductors.

In the current rate-cut phase, both are emerging not as peripheral EM trades but as stable destinations for global capital.

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4️⃣ Investor Checklist (Summary)

1️⃣ Track the Fed’s Rate-Cut Trajectory

→ If cuts extend through 2025–2026, expect sustained dollar weakness and a more decisive reallocation toward EM, especially Asia tech exporters.

2️⃣ Mind Your FX Hedges

→ In phases of won/TWD strength, unhedged exposure can erode margins and portfolio returns. Consider FX-hedged ETFs or forwards.

3️⃣ Map the Value Chain

→ AI, energy, and infrastructure capex are accelerating; semiconductors and materials remain best positioned to capture that spend.

4️⃣ Monitor Policy Uncertainty

→ Keep a standing watch on IRA tax-credit changes, U.S.–China tech and trade policies, and broader supply-chain geopolitics.

5️⃣ Let the Financials Speak

→ Prioritize ROE and operating-margin trends over a generic “Fed effect.” Durable earnings momentum should anchor allocation.

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📘 Conclusion — “Rate Cuts = Short Rally” Is the Wrong Frame

A Fed easing cycle is not merely a sugar high; it represents a re-direction of global capital.

Hot money moves first, but what stays is dictated by technology, export depth, and energy competitiveness.

On that score, Korea and Taiwan are likely to remain core beneficiaries even in a lower-rate world.

Don’t get whipsawed by day-to-day FX moves; instead, read the evolving capital map that earnings and data are drawing.

That perspective will do more to determine outcomes in the post-2026 global market cycle than any single month of headlines.

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📎 Sources & References: FED, IMF, ADB, EPFR Global, UBS Asset Management, TrendForce, Refinitiv, Bloomberg, KRX, TWSE, Samsung Electronics & TSMC IR materials (as of Oct 2025).