Won Strengthens as Korea-US Rate Gap Narrows, Dollar Selling Rises
Summary
- Back-to-back benchmark rate hikes narrowed the Korea-US rate gap, sending the won-dollar exchange rate to its lowest level in 13 months.
- Increased dollar selling tied to domestic semiconductor investment by Samsung Electronics and SK Hynix, as well as their shareholder returns programs, is adding pressure for the exchange rate to fall further.
- A larger current-account surplus combined with corporate currency conversion demand could drive further gains in the won, with the won-dollar exchange rate potentially falling to 1,340 to 1,350.
Forecast Trend Report by Period
The won-dollar exchange rate has fallen to its lowest level in 13 months. Consecutive rate hikes by the Bank of Korea have narrowed the gap with US rates, while increased dollar selling by semiconductor exporters has added support for the Korean currency.
In Seoul trading on Aug. 28, the won closed at 1,372.5 per dollar in the daytime session, the lowest since July 24, 2025, when it finished at 1,367.2. The dollar later rebounded after Fed Chair Kevin Warsh stressed his commitment to price stability in a Jackson Hole speech, but the exchange rate remained below 1,380 won at 1,379.5 as of 6 a.m. on Aug. 29.
One of the main drivers of the won's recent strength is the rapidly narrowing gap between South Korean and US benchmark rates. The Bank of Korea raised its policy rate again this month after increasing it last month, bringing it to 3.0%. That narrowed the gap with the upper end of the US benchmark rate, now 3.75%, to 0.75 percentage point, the smallest spread since November 2022.
Dollar selling by exporters is also putting downward pressure on the exchange rate. Samsung Electronics and SK Hynix have signaled major investment in domestic semiconductor production facilities, increasing the need to convert overseas dollar earnings into won. Additional dollar selling could also emerge as the companies secure funds for shareholder returns.
The medium- to long-term outlook for the won also remains supportive. In a recent report, the Institute of International Finance said South Korea's current-account surplus could reach 10% of gross domestic product by next year. A large current-account surplus combined with corporate demand for currency conversion could create room for further gains in the won.
Kwon A-min, an analyst at NH Investment & Securities, said the won-dollar exchange rate could fall to 1,340 to 1,350 if foreign-exchange conversions by Samsung Electronics and SK Hynix begin in earnest.
In the bond market, expectations that the Bank of Korea may not accelerate additional rate hikes more than anticipated were also reflected in prices. The yield on three-year South Korean government bonds ended trading on Aug. 28 at 3.788%, down 0.066 percentage point from a week earlier.
Although the Bank of Korea raised its benchmark rate to 3.0% on Aug. 27, the median projection from Monetary Policy Board members for the policy rate six months ahead was 3.25%. Markets interpreted that as a sign the central bank may monitor whether further increases are needed for now while adjusting the pace of any additional tightening.
