Bank of Korea (BOK) warns weak won risks inflation as USD/KRW diverges from fundamentals

Summary:Bank of Korea Governor Rhee Chang-yong said the central bank will review its forward guidance framework on the future path of interest rates.Rhee warned that excessive won weakness could harm domestic businesses and add to inflation pressures.He said USD/KRW levels above 1,400 appear disconnected from Korea’s economic fundamentals.The BOK will not support U.S.-bound investment decisions that could undermine foreign-exchange stability.Authorities are considering expanding special lending programmes for small businesses.Rhee also called for a comprehensive review of pension funds’ overseas investments, citing FX implications.-The Bank of Korea has signalled growing unease over foreign-exchange volatility, with Governor Rhee Chang-yong warning that the current level of won weakness appears increasingly misaligned with South Korea’s economic fundamentals and risks feeding domestic inflation pressures.Rhee said the central bank will review its forward guidance approach on the future path of interest rates, an indication that policymakers are reassessing how monetary policy signals are being interpreted by markets. While he stopped short of committing to a policy shift, the comments suggest heightened sensitivity to financial conditions, particularly currency moves.Rhee highlighted concerns that a persistently weak won could do more harm than good for the domestic economy. He warned that depreciation may weigh on Korean businesses by raising import costs and squeezing margins, while also amplifying inflationary pressures at a time when price stability remains a key policy focus. The governor added that the USD/KRW exchange rate trading above the 1,400 level seems far from the Korean economy’s fundamentals, reinforcing the message that current FX levels may not be justified by underlying conditions.The BOK chief also drew a clear line on cross-border investment decisions, stating that authorities would not agree to U.S.-bound investments if they threaten foreign-exchange stability. The remarks underscore official concern that large-scale capital outflows — particularly by institutional investors, could exacerbate currency volatility.In that context, Rhee said policymakers see a need for a comprehensive review of pension funds’ overseas investment strategies. South Korea’s large pension funds have steadily increased foreign asset exposure in recent years, a trend that can create structural FX selling pressure during periods of market stress.Beyond FX issues, Rhee said the central bank will review the scope for expanding special lending facilities aimed at supporting small businesses, signalling a desire to balance financial stability concerns with targeted economic support.Taken together, the comments point to a more holistic policy stance from the BOK, with FX stability, capital flows and financial conditions now playing a more prominent role alongside traditional inflation and growth considerations.-Earlier from South Korea, in brief:South Korea’s manufacturing sector returned to expansion in December after two months of contraction, helped by a rebound in export demand.The manufacturing PMI rose to 50.1, back above the expansion threshold after holding at 49.4 in the prior two months.New orders grew for the first time in three months, posting the strongest increase since November 2024, with export orders also recovering.Output remained in contraction, though the pace of decline eased compared with November.Input buying picked up sharply, while inventories of finished goods fell at the fastest pace since May 2025.Business optimism jumped to a 3½-year high, driven by expectations of expansion and new product launches, notably in autos and semiconductors.Input cost inflation accelerated, hitting its fastest pace since mid-2022 due to currency weakness, pushing output prices to a nine-month high.
This article was written by Eamonn Sheridan at investinglive.com.

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