The South Korean won appreciated sharply by approximately 13% against the US dollar in the third quarter of this year, marking its largest quarterly advance since the fourth quarter of 1998.
Hwang Kunil, the member of the Bank of Korea's monetary policy committee widely regarded by the market as the most dovish, publicly warned that the recent pace of the won's appreciation has exceeded expectations and that exchange rate volatility risks warrant close attention.
According to a Reuters report dated October 29, Hwang Kunil stated, "When assessing exchange rates, one should focus on volatility and the speed of change, rather than the absolute level. The recent pace of the won's appreciation has somewhat exceeded expectations, and we are closely monitoring fluctuations." He also noted that once the massive current account surplus and foreign capital rebalancing effects are absorbed, downward pressure on the exchange rate will persist. This was Hwang Kunil's first public statement on monetary policy trade-offs since joining the central bank committee in February 2024.
The warning came as the Bank of Korea chose to hold rates steady this month after two consecutive hikes, keeping the benchmark rate at 3.00%, while not closing the door to further tightening. A strong won, while suppressing inflation, also deals a blow to the export-oriented economic structure and exacerbates operational difficulties for small and medium-sized enterprises, leaving monetary policy caught in a dilemma.
Quarterly Won Gain Largest in Nearly Three Decades, AI Chip Demand the Main Driver
The won appreciated approximately 13% against the US dollar in the third quarter, the largest quarterly gain since the fourth quarter of 1998. Hwang Kunil attributed the primary driver of this appreciation to large-scale dollar inflows brought about by the global artificial intelligence infrastructure construction boom—robust AI computing demand propelled a surge in demand for specialized memory chips produced by South Korea's top chipmakers SK Hynix and Samsung Electronics, thereby channeling substantial dollar funds into South Korea.
Hwang himself previously served as South Korea's Vice Minister of Finance and as an Executive Director at the World Bank, making him a veteran financial diplomat. He led South Korea's exchange rate policy during Trump's first term and endured enormous external pressure in Washington when the US accused Seoul of deliberately engineering an excessively high current account surplus.
Hwang expects that South Korea's current account surplus this year could be revised upward from the central bank's August forecast of $450 billion to nearly $500 billion. He also noted that if global AI spending slows, reducing the surplus by about $50 billion (roughly one-tenth of the total surplus), it would "of course" deal a blow to export-led growth—but he also stated that "this boom cycle may last longer."
Export Competitiveness Under Pressure, Strong Won's Impact Not Uniformly Felt
Although a strong currency typically helps lower import costs, Hwang Kunil explicitly pointed out that exports remain the cornerstone of South Korea's macroeconomic structure. "Exports are no longer what they once were, but they are still the pillar of our economic structure," he said.
The rapid appreciation of the won directly weakens the price competitiveness of South Korean exports, putting pressure on manufacturing enterprises reliant on overseas markets. Hwang stated that despite strong export momentum, the positive effects of economic growth have not been evenly distributed. The pace of private consumption recovery remains sluggish, with the fruits of economic prosperity highly concentrated among specific groups.
"The positive effects are limited to specific groups, while high interest rates and high prices affect everyone," he said. "The ultimate outcome depends on which side's strength is greater."
SME Default Rates Climbing, Real Economy Bears Asymmetric Shock
Hwang Kunil expressed clear concern about the situation of small and medium-sized enterprises.
He noted that default rates among SMEs continue to rise, domestic demand is weak, and operational pressure is significant. More alarmingly, these enterprises' borrowing is not being used to expand capital investment, but primarily to cover immediate operating costs such as wages and raw materials—a phenomenon that reflects deep-seated hidden risks in corporate balance sheet quality.
The report noted that the strong won creates an asymmetric shock in this context: large export enterprises can still absorb exchange rate pressure thanks to AI chip demand dividends, while SMEs can neither benefit from the export boom nor avoid the double squeeze of high financing costs and tight operating capital under a high interest rate environment.
Inflation Path Under Pressure, Monetary Policy Caught in Dilemma
Regarding the inflation outlook, Hwang Kunil provided a clear timeline: headline consumer price inflation is expected to begin approaching the central bank's 2% target by the end of the first half of 2027, and fully stabilize at the target level by the end of 2027 or early 2028. He emphasized, "What deserves the most attention right now, of course, is the trajectory of inflation."
The won's appreciation objectively exerts a suppressive effect on the inflation path—falling import prices help curb price levels, which to some extent may accelerate the process of inflation returning to target. However, this also makes the central bank's policy decisions more complex:
On one hand, energy price risks and economic resilience support the need for further tightening; on the other hand, rapid exchange rate appreciation, pressure on SMEs, and sluggish consumption recovery constrain excessive tightening.
The Bank of Korea kept its policy rate unchanged at 3.00% this month, pausing after two consecutive hikes, but explicitly retained the option of further rate increases.
As one of the most dovish members of the committee, Hwang previously voted against the August rate hike decision. His public warning this time about the pace of exchange rate appreciation further highlights internal divisions within the central bank over policy direction, as well as the difficult position of seeking balance between the exchange rate, inflation, and the real economy.
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