South Korean Won gains on back-to-back BoK interest rate hikes

• South Korean Won rises against the US Dollar as the BoK raises interest rates again.
• The BoK pushes policy rates higher to 3%, in an attempt to increase pressure on high inflation.
• Higher-than-expected growth in the US PCE Price Index data for July has offered support to the US Dollar.

The South Korean Won (KRW) trades higher against the US Dollar (USD) on Thursday, with USD/KRW falling 0.3% to near 1,380 during the Asian trading session. The pair revisits its 11-month low as back-to-back interest rate hikes by the Bank of Korea (BoK) have strengthened the currency.

Earlier in the day, the BoK raised its policy rate by 25 basis points (bps) to 3%, as expected, in an attempt to extend pressure on inflation staying above the central bank’s 2% target.

Inflationary pressures in South Korea cooled to 2.8% Year-on-Year (YoY) in July from 3.2% in June, but the South Korean central bank needed to tighten monetary conditions further to make sure that it returns to the 2% target.

In the policy statement, the BoK also revised up this year’s growth estimate to 3.3% from the 2.6% projected in July. It left this year’s inflation forecast unchanged at 2.7%, Reuters reported.

The South Korean Won has been outperforming the US Dollar for weeks as dollar flows into the Asian nation remained high amid enthusiasm for investment in its companies building sophisticated memory chips and semiconductors.

Won outperforms as AI optimism and buyback flows drive USD/KRW lower

Analysts at Societe Generale note that, in Asia, the Korean Won “continues to lead performance among major Asian currencies, climbing 12% vs USD on a spot basis YTD.” They highlight that the sharp “move in USD/KRW from around 1560 in early June to below 1380 appears stretched but illustrates enthusiasm surrounding the AI and semiconductor sectors.” According to the bank, the earlier SK Hynix ADR-related Dollar inflows seen in July are now being complemented by “sizeable buyback announcements from Samsung ($80bn) and SK Hynix ($28bn), with associated won conversion flows potentially generating additional dollar selling,” reinforcing support for the currency.

On the US Dollar front, hot United States (US) Personal Consumption Expenditure (PCE) Price Index data for July has strengthened the currency. The core PCE Inflation, which is closely tracked by Federal Reserve (Fed) officials, arrived higher at 3.7% Year-on-Year (YoY), while it was expected to remain steady at 3.4%.