KRW: South Korea's central bank tightens policy, supporting the won against the dollar - Commerzbank

South Korea's central bank announced its second consecutive rate hike of 25 basis points, raising the benchmark rate to 3.0%, while maintaining a tightening policy stance. Commerzbank analyst Charlie Lay noted in a report that this move provides further support for the won, which has already appreciated significantly since June.

**Rate hike supports the won exchange rate**

The central bank's consecutive rate hikes aim to stabilize the exchange rate by enhancing the attractiveness of won-denominated assets. According to Commerzbank's analysis, despite the won's notable appreciation earlier, the central bank still chose to tighten policy, underscoring its focus on exchange rate stability. The USD/KRW pair is currently trading around 1376.25038, with the market reacting relatively calmly to the rate hike news.

**Government takes multiple measures to stabilize the FX market**

Beyond monetary policy, the South Korean government has also introduced a series of supporting measures. The finance ministry previously stated that as major chip and shipbuilding companies sell dollars heavily in the forward market, the FX market situation is improving. The government also plans to relax foreign exchange transaction regulations related to capital flows, including providing incentives for won-settled current account transactions and expanding channels for foreign investors to invest in won-denominated financial products, thereby boosting demand for the won.

**Institutional views and market reaction**

Market sources indicate that South Korean authorities have held multiple meetings recently to discuss the won's trajectory and have announced a range of tax measures to stabilize the foreign exchange market. The National Pension Service is reportedly initiating strategic FX hedging operations. A market strategist at BNY Mellon believes these steps constitute "forceful smoothing operations" aimed at normalizing supply-demand imbalances. However, according to Reuters, the USD/KRW pair showed a muted reaction to the rate hike, suggesting the market had already partially priced in the policy expectations.