BOK delivers back-to-back rate hikes, signals gradual tightening ahead

On Thursday, the South Korean Won strengthened against the US Dollar, with the USD/KRW rate dropping 0.3% to approximately 1,380 during Asian trading hours. This gain followed consecutive interest rate hikes by the Bank of Korea (BoK), which boosted the currency's value. The BoK increased its policy rate by 25 basis points to 3%, aiming to curb inflation that remains above the 2% target.

Although South Korea's inflation cooled to 2.8% year-over-year (YoY) in July from 3.2% in June, the central bank felt the need for further monetary tightening to reach the 2% goal. In its policy statement, the BoK also upgraded the country's growth forecast for the year to 3.3% from the 2.6% projected in July, while keeping the inflation forecast unchanged at 2.7%.

The South Korean Won has been outperforming the US Dollar for weeks, with the currency pair climbing 12% versus the USD year-to-date (YTD). Analysts at Societe Generale note that the USD/KRW pair has moved from around 1,560 in early June to below 1,380, indicating strong enthusiasm for the AI and semiconductor sectors. To support the currency, significant dollar inflows from companies like Samsung ($80bn) and SK Hynix ($28bn) have been converted into won, potentially generating additional dollar selling.

The US Dollar's strength was bolstered by robust Personal Consumption Expenditure (PCE) Price Index data for July, with core PCE inflation at 3.7% YoY, exceeding expectations of 3.4%. The BoK's interest rate decision is closely watched by analysts, who consider a hawkish stance on inflation and rate hikes as positive (bullish) for the KRW, while a dovish outlook or rate cuts are seen as negative (bearish) for the currency.