South Korean Won: Growth-driven recovery offers policy lesson – ING
Chris Turner at ING explains that Korea’s earlier massive portfolio outflows and a weaker Korean Won (KRW) pushed USD/KRW to 1560 in June, despite a large current account surplus.
South Korea has experienced a growth-driven economic recovery that has helped stabilize the Korean Won (KRW) and provided valuable lessons for other countries, according to ING. In June, the USD/KRW exchange rate had reached a high of 1560 due to massive portfolio outflows and a weaker KRW, despite the country's significant current account surplus.
However, the Bank of Korea's response to the situation, including changes in National Pension Service hedging and increased access to FX liquidity, played a crucial role in the recovery.
The AI-led export boom has expanded across the Korean economy, leading to a stronger 2Q GDP growth of 0.6% quarter-on-quarter and contributing to the Bank of Korea's rate hike to 2.75% in July. This growth has also encouraged exporters to repatriate more foreign earnings, allowing the current account surplus to reach up to $50 billion monthly.
While it is not yet clear if the USD/KRW rate needs to drop much below 1400, the turnaround in the Korean economy showcases the importance of fostering a favorable domestic investment environment. This approach could serve as a valuable lesson for Japanese authorities looking to strengthen their domestic currency.
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