AI Chip Boom Drives Korean Won to Biggest Quarterly Gain Since 1998

AI Chip Boom Drives Korean Won to Biggest Quarterly Gain Since 1998

TREE NEWS reports: The South Korean won surged approximately 13% against the US dollar in the third quarter of 2025, marking its largest quarterly advance since the fourth quarter of 1998. The rally has been fueled by massive dollar inflows linked to the global artificial intelligence infrastructure buildout, which has supercharged demand for advanced memory chips produced by SK Hynix and Samsung Electronics. The surge has prompted a rare public warning from a senior central bank official about the pace of appreciation and its potential risks to the export-dependent economy.

Central Bank Warning

Hwang Kunil, a Bank of Korea Monetary Policy Board member widely viewed as the most dovish on the committee, said the recent pace of won appreciation has exceeded expectations and warrants close monitoring. “When assessing the exchange rate, one should focus on volatility and the speed of change, not the absolute level,” Hwang said. “The recent pace of won appreciation is somewhat faster than expected, and we are closely monitoring fluctuations.” He added that downward pressure on the exchange rate will persist once the massive current account surplus and foreign capital rebalancing effects are digested. This was Hwang’s first public comment on monetary policy trade-offs since joining the board in February 2024.

The warning comes as the Bank of Korea held its benchmark interest rate at 3.00% this month after two consecutive hikes, while leaving the door open to further tightening. The strong won is helping suppress inflation but is also squeezing the export-oriented economy and worsening conditions for small and medium-sized enterprises (SMEs), putting monetary policy in a bind.

Market Implications

The won’s rapid appreciation has far-reaching implications across asset classes:

• Currencies: The won’s strength is a direct result of AI-driven dollar inflows. If the AI investment cycle slows, the currency could reverse sharply. Traders should watch for intervention rhetoric and possible smoothing operations by the authorities.
• Equities: Large-cap chipmakers like SK Hynix and Samsung are benefiting from the AI boom, but a stronger won erodes the won-translated value of their overseas earnings. Export-oriented manufacturers face margin pressure, while domestic-focused SMEs struggle with high borrowing costs.
• Bonds: The Bank of Korea’s cautious stance and the won’s strength complicate the rate outlook. Further tightening may be limited if the currency continues to appreciate and growth falters, which could support bond prices.
• Commodities: A stronger won reduces import costs for commodities priced in dollars, potentially easing inflationary pressures but also reflecting softer global demand outside the AI sector.
• Crypto: The won is a major fiat gateway for crypto trading. A stronger won could boost Korean purchasing power in dollar-denominated crypto markets, but regulatory scrutiny remains high.

Context and Investor Takeaways

Hwang expects South Korea’s current account surplus to reach nearly $500 billion this year, up from the central bank’s August forecast of $450 billion. He cautioned that a slowdown in global AI spending could cut the surplus by about $50 billion—roughly a tenth—and “of course” would hit export-led growth. However, he added that “this boom cycle may last longer.”

Despite the strong currency, Hwang emphasized that exports remain the backbone of the economy. “The status of exports is not what it used to be, but it is still the pillar of our economic structure,” he said. The positive effects of the export boom are not evenly distributed: private consumption recovery is slow, and the benefits are concentrated among specific groups. “The positive impact is limited to certain groups, while high interest rates and high prices affect everyone,” he noted.

Hwang also expressed concern about SMEs, where default rates are rising and domestic demand is weak. Borrowing by these firms is largely used to cover immediate operating costs such as wages and raw materials, rather than for capital investment—a sign of deeper balance sheet vulnerabilities. The strong won creates an asymmetric shock: large exporters can absorb currency pressures thanks to AI chip demand, while SMEs face both high financing costs and tight operating capital.

On inflation, Hwang expects headline consumer price inflation to approach the central bank’s 2% target by the end of the first half of 2027 and to stabilize fully by late 2027 or early 2028. He stressed that “the most important thing to watch now is, of course, the inflation trajectory.” The won’s appreciation is helping to suppress inflation by lowering import prices, which could accelerate the return to target. However, this complicates the Bank of Korea’s policy decisions: energy price risks and economic resilience support further tightening, while rapid currency appreciation, SME stress, and weak consumption argue against over-tightening.

For investors, the key takeaways are:

• Monitor the pace of won appreciation and any signs of central bank intervention or verbal warnings.
• Watch the AI investment cycle closely—any slowdown could trigger a sharp reversal in the won and hit Korean exporters.
• Keep an eye on the Bank of Korea’s policy signals, especially given internal divisions and the dovish stance of some members.
• Consider the divergent impact on large-cap exporters versus SMEs, and the potential for increased volatility in Korean assets.

The won’s surge is a double-edged sword: it reflects Korea’s pivotal role in the AI supply chain but also exposes the economy’s vulnerabilities. As Hwang’s comments suggest, the central bank is walking a tightrope between controlling inflation and supporting growth, with the exchange rate adding another layer of complexity.