Won Hits Two-Year High Against Dollar, With BOK Governor Signaling Further Gains

A display board shows the KOSPI, KOSDAQ and won-dollar exchange rate at the dealing room of Hana Bank's headquarters in Jung-gu, Seoul, on Oct. 21. The won has strengthened to the low 1,330-won range against the U.S. dollar, reaching its strongest level in more than two years. The unusual move has come despite several factors that would typically weaken the won, including high oil prices, a stronger dollar and net selling by foreign investors. On Oct. 20, the won-dollar exchange rate continued to trade in the 1,330-won range in the Seoul foreign exchange market. The won closed at 1,330.3 per dollar on Oct. 19, its strongest closing level since Oct. 2, 2024. From 1,549.4 at the end of June, the exchange rate has fallen by more than 219 won in just four months, marking a sharp appreciation of the Korean currency. The recent decline has defied the usual dynamics of the foreign exchange market. Typically, a sharp rise in international oil prices and an increase in the dollar index would put downward pressure on the won. Yet Dubai crude prices rose 35.8% in October from June, while the dollar index gained 1.9%, even as the won-dollar exchange rate fell 12.2%. The won also continued to strengthen despite foreign investors withdrawing $76.84 billion in portfolio investment from June through September. The main driver appears to be the abundant supply of dollars generated by a semiconductor export boom. South Korea's current account surplus reached $46.11 billion in August, the second-largest monthly surplus on record, bringing the cumulative surplus for the first eight months of the year to $279.2 billion. The figure was nearly four times the surplus recorded over the same period last year. Corporate foreign-currency deposits also exceeded $100 billion for the first time at the end of August, reinforcing the market's supply of dollars. Bank of Korea Governor Shin Hyun-song has said the exchange rate remains relatively high, leaving room for further declines. Speaking at a parliamentary audit on Oct. 12, Shin said, “The current exchange rate is still higher than the levels we were previously accustomed to.” He also said the preemptive rate increases in July and August had strengthened confidence in monetary policy and helped stabilize the currency. The government has expressed a similar view. Deputy Prime Minister and Minister of Economy and Finance Lee Hyeong-il recently said the exchange rate's surge into the 1,550-won range in July had itself taken it beyond levels justified by economic fundamentals. His remarks suggest that the government sees the won's recent appreciation as a normalization process, with the exchange rate moving back toward levels more consistent with the country's underlying economic conditions. Markets expect the Bank of Korea to keep its policy rate unchanged at the Monetary Policy Board meeting scheduled for Oct. 22, allowing more time to assess the effects of two consecutive rate hikes. Major brokerages, including Samsung Securities and KB Securities, expect the central bank to hold rates steady at this meeting and potentially consider another increase in November, citing September inflation of 2.9% and the stronger won. The biggest factor determining the exchange rate's future direction, however, will be the semiconductor industry's performance. If concerns over the profitability of artificial intelligence investment trigger further declines in the Philadelphia Semiconductor Index and weaken the export outlook, the supply of dollars could diminish. Demand for dollars as foreign investors convert dividend payments from Korean companies in November, along with the outcome of the U.S. midterm elections, could also increase short-term volatility. 비지니스코리아 businesskorea (Businesskorea)