The South Korean won's appreciation against the US dollar may be running out of steam, according to strategists at OCBC, even as a surprise rate hike by the Bank of Korea provided a short-term boost.
In recent weeks, the won strengthened on improved risk appetite, expectations of a less aggressive Federal Reserve, and solid South Korean export performance in semiconductors and automobiles. However, OCBC cautioned that the pace of gains could moderate as those tailwinds fade, pointing to household debt levels and external demand risks.
On Thursday, the Bank of Korea delivered its first rate increase in nearly a year, raising its policy rate by 25 basis points to 3.75%. The move lifted the won by about 0.6% against the dollar, making it the best performer among Asian currencies. The central bank also revised its inflation forecast upward, signaling a hawkish stance aimed at narrowing the interest-rate differential with the United States.
Meanwhile, the US dollar index held firm as markets awaited Federal Reserve Chair Jerome Powell's speech at the Jackson Hole symposium. Anticipation of continued US monetary tightening has supported the greenback and kept pressure on Asian emerging-market currencies. The Japanese yen remained weak near 137 per dollar, while the Australian dollar slipped and the Chinese yuan stayed rangebound.
OCBC's outlook suggests the won's appreciation trend is intact but likely to slow, with potential stabilization in the dollar, surprises in US economic data, and Korean peninsula geopolitical tensions all posing risks. The currency's trajectory will also depend on the Bank of Korea's data-dependent policy moves.
