Korean Won Sees Strong Support Amid Surplus Flows and BoK Tightening

South Korea's currency, the Won (KRW), has seen significant strength against the US Dollar (USD) in recent months, driven by the country's large current-account surplus. According to Commerzbank analysts Charlie Lay and Dr. Henry Hao, this surplus is being recycled, allowing the KRW to appreciate more directly. The National Pension Service (NPS) has been increasing its hedging activities, reducing financial-account offsets, which in turn supports the Won.

The Bank of Korea (BoK) has acknowledged that the stronger won is already tightening financial conditions, leading analysts to expect further gains for the KRW to be more gradual. The USD/KRW exchange rate has fallen sharply since June, from around 1,560 to 1,385, implying a gain of over 12% for the KRW against the USD.

Commerzbank expects the USD/KRW exchange rate to consolidate in the near term, potentially around the 1,350-1,400 area. The analysts note that further tightening by the BoK is expected, but this will provide additional support rather than being the primary driver of KRW strength.