KRW: Growth-Driven Recovery Offers Policy Lessons – ING

USD/KRW is currently at 1387.2875, notably down from the June high of 1560, indicating the won has emerged from the earlier weakness phase dominated by portfolio outflows. ING analyst Chris Turner explains that South Korea's previous large-scale portfolio outflows and won weakness pushed USD/KRW to 1560 in June, despite a substantial current account surplus. This contradiction suggests the won's depreciation at the time was driven more by capital flows and market sentiment than by fundamental deterioration.

**Exchange Rate Implications of a Growth-Driven Recovery**

The won's rebound is underpinned by improved growth expectations. As an export-oriented economy, South Korea's current account surplus provides structural support for the won. When market sentiment shifts from risk-off to risk-on, portfolio flow dynamics reverse, allowing the won to recoup some losses. Turner's analysis implies that policymakers should focus on capital flow volatility rather than relying solely on current account surpluses to stabilize the exchange rate.

**Policy Lessons: Focus on Capital Flows, Not Just Trade**

The Bank of Korea previously held an emergency meeting during the won's sharp depreciation, with Governor Rhee Chang-yong stating that the won's movements were "seriously out of step" with economic fundamentals, hinting at possible intervention to stem the decline. The won's current recovery to around 1387 suggests the market's pricing of South Korea's growth outlook is being repaired. For policymakers, a growth-driven recovery implies a greater emphasis on guiding stable portfolio capital repatriation rather than relying solely on FX intervention.

**Risks and Outlook**

Despite the won's clear rebound, shifts in global risk appetite and major central banks' policy paths could still trigger periodic volatility. According to market sources, traders remain cautious in their expectations for near-term rate adjustments by major central banks. Whether the won can sustain its recovery depends on whether South Korea's growth momentum can continue attracting foreign capital inflows and whether external financial conditions remain accommodative.