Korean Won Rallies on Strong Chip Exports and Hawkish BoK

The South Korean Won (KRW) has seen a significant drop in its value against the US Dollar, USD/KRW, earlier this year. According to ING economists Deepali Bhargava and Lynn Song, this sharp decline was driven by temporary factors such as Hynix's repatriation of $16bn ADR receipts and the National Pension Service adjusting its hedging ratios.

However, a key factor in supporting the KRW is the Bank of Korea's (BoK) hawkish stance. The BoK hiked interest rates in July, which contributed to the currency's resilience. Additionally, strong chip exports and investment in the AI industry are stoking domestic demand and keeping inflation above target.

The market currently prices another 50bp of hikes by year-end, indicating further tightening by the BoK. Despite high volatility in USD/KRW trading at a 12% p.a. level, a stable Federal Reserve and ongoing AI demand can help support the KRW.