The South Korean won has emerged as the best-performing major currency against the US dollar this month, gaining 6.24% since July 1, significantly outperforming other major currencies like the Australian dollar and Russian ruble, which each rose by 0.9%. This rally comes despite broader dollar strength and geopolitical tensions, which have sustained demand for safe-haven assets. The won strengthened to 1,458.5 per dollar, a sharp turnaround from June's intraday high of 1,555.2 per dollar, marking a rebound from its lowest inflation-adjusted value in over 17 years (82.99 on the BIS real effective exchange rate in June).
Several factors are contributing to this resurgence. A major driver is dollar selling by Korean exporters, including SK hynix. The chipmaker is gradually converting and repatriating about $26.5 billion raised from its American depositary receipts (ADR) listing on Nasdaq earlier this month. This significant inflow of dollars into the Korean market is expected to continue through August or September, creating a substantial new supply of dollars and supporting the won's appreciation.
Adding to the won's strength is the Bank of Korea's shift towards tighter monetary policy. On July 16, the central bank raised its benchmark rate by 25 basis points to 2.75%, its first increase in three and a half years. Markets anticipate one or two additional rate hikes by year-end, further bolstering the won. Furthermore, strong domestic economic fundamentals and a return of foreign investors to Korean equities, with overseas investors purchasing a net 2.136 trillion won ($1.46 billion) of Kospi shares on July 23 alone, are providing additional support.
This robust performance has led to an unusual divergence from the Japanese yen, which typically moves in tandem with the won due to similar export-driven economies. While the won has appreciated by more than 5% this month, the yen has slipped by about 0.5%. The won-yen cross rate fell below 900 won per ¥100 for the first time in roughly 20 months. Analysts expect the won-dollar exchange rate to gradually fall into the mid-to-upper 1,400 won range, though some economists caution that SK hynix's dollar conversions may be spread over a longer period, potentially mitigating the immediate impact on the exchange rate.
