The South Korean Won (KRW) appreciated against the US Dollar (USD) following the Bank of Korea's (BoK) decision to raise its benchmark interest rate by 25 basis points to 2.75%, marking the central bank's first rate hike in three-and-a-half years [1]. In response, the USD/KRW pair declined to approximately 1,484.68 during Asian trading on Thursday, reversing earlier gains [1]. The BoK indicated a willingness to consider further rate hikes, aiming to stabilize the weakening KRW and address ongoing inflationary pressures [1].
BoK Governor Hyun-Song Shin emphasized the central bank's commitment to responding until inflation aligns with its target, noting that persistent demand-side price pressures could intensify inflation if the robust increase in Gross Domestic Income (GDI) continues [1]. The KRW has been outperforming the USD for over two weeks, as market participants had largely anticipated the BoK's rate hike [1].
Meanwhile, the US Dollar Index (DXY), which measures the USD against six major currencies, traded slightly higher near 100.50 after a sharp decline over the previous two trading days [1]. This recent weakness in the USD was attributed to softer US inflation data, which led traders to lower their expectations for a Federal Reserve rate hike at the upcoming July meeting. According to the CME FedWatch tool, the probability of a Fed rate hike in July dropped to 10.2% from 31% a week earlier [1].
CONCLUSION
The Bank of Korea's rate hike has provided support to the South Korean Won, reflecting the central bank's proactive stance against inflation. With the BoK signaling openness to further tightening and the US Dollar under pressure from softer inflation data, the KRW may continue to benefit from these diverging monetary policy outlooks.