Korean won will gain against dollar when Iran conflict eases: BOK chief

Bank of Korea Gov. Rhee Chang-yong bangs the gavel to open a Monetary Policy Board meeting at the central bank in Seoul, Friday. It was Rhee's last meeting before his term ends on April 20. Joint Press Corps

If tensions in the Middle East stabilize, the won-dollar exchange rate will likely “fall back just as quickly as it surged,” Bank of Korea (BOK) Gov. Rhee Chang-yong said Friday.

The central bank also held its benchmark interest rate steady at 2.5 percent, marking the seventh consecutive freeze since July 2025 as mounting inflationary pressure and foreign exchange volatility left little room for a policy shift.

Following the outbreak of the U.S.-Israel war against Iran in late February, the won weakened past the 1,500-per-dollar level, even breaching 1,530 for its worst point since 2009 during the global financial crisis.

“Foreign investors sold about $7 billion in Korean equities over the entire last year. But this year, from January to April alone, net selling jumped nearly sevenfold to reach $47.8 billion,” Rhee said during a press conference at BOK headquarters in Seoul.

It was Rhee’s last Monetary Policy Board meeting at the central bank before his term ends on April 20. He will likely be succeeded by nominee Shin Hyun-song, a former economic adviser and head of the Monetary and Economic Department at the Bank for International Settlements (BIS), whose parliamentary confirmation hearing is slated for April 15.

The BOK chief attributed the foreign capital outflows to a combination of factors, including heightened sensitivity to geopolitical risks in the Middle East and a domestic market that had posted steep gains in recent months.

The local bourse’s heavy reliance on IT and semiconductor stocks made it easier for foreign investors to lock in profits and pull funds when conditions turned volatile.

Rhee then cited several factors that could help stabilize the won if tensions in the Middle East ease, including potential inflows tied to Korea’s inclusion in the World Government Bond Index and signs that outbound investment by retail investors is decreasing. Discussions are also underway to scale back overseas investment by the National Pension Service this year.

Regarding the BOK’s decision to hold rates, Rhee said that the trajectory of the U.S.-Iran situation and its impact on domestic prices and growth remains highly uncertain.

“Economic variables have been moving too rapidly in response to developments in the Middle East,” he said. He added that, unlike during the Russia-Ukraine war, when Europe bore the brunt due to its reliance on Russian natural gas, the current conflict will weigh more heavily on Asia, where dependence on crude imports is higher.

“So before debating whether to raise or lower rates, we need to see how the situation plays out and whether the ceasefire holds,” he said. “Only then can meaningful policy discussions begin.”

Amid such unpredictability, the risk of stagflation cannot be completely ruled out, the BOK head said, noting that the outlook for this year points to slower economic growth and much higher inflation than what the central bank previously forecast in February.

“If energy infrastructure were to be damaged in surprise retaliatory strikes, the impact could be long-lasting even after the war itself ends,” he said. “In a worst-case scenario, it would be difficult to rule out stagflation.”

Meanwhile, the Asian Development Bank projected that Korea’s economy will grow 1.9 percent this year, 0.2 percentage points higher than its December forecast.

The upgrade reflects stronger exports driven by the semiconductor sector, a gradual recovery in consumption despite delayed rate cuts, and expectations of increased government spending in strategic industries such as semiconductors, defense and biotechnology.

However, external risks, such as geopolitical tensions and U.S. tariffs, are expected to affect the outlook.