The Kospi's AI-driven rally is concentrated in semiconductors, leaving the won near crisis-era levels. Hedging flows, terms of trade, and policy divergence explain the gap. The next catalyst is the BoK decision.
South Korea's benchmark Kospi index has been one of the best-performing equity markets globally over the past year, driven by surging demand for semiconductors tied to the artificial intelligence boom. SK Hynix and Samsung Electronics have led the charge, with their memory chips powering the data centres and AI models that have captured investor imagination. The South Korean won has not followed. The currency continues to trade near levels last seen during the 2008 financial crisis and the 2022 global rate shock, creating a stark divergence that demands explanation.
The Kospi's rally is concentrated in the semiconductor sector, which accounts for roughly one-third of the index's market capitalisation. SK Hynix has been the standout beneficiary, with its high-bandwidth memory (HBM) chips becoming a critical component in Nvidia's AI accelerators. Samsung Electronics, the larger of the two, has also seen its memory and foundry businesses benefit from the AI capex cycle. Foreign investors have poured capital into these names, pushing the Kospi to multi-year highs.
This is a classic sector readthrough story. The AI catalyst is not lifting all boats equally. The broader Kospi, including autos, chemicals, and financials, has lagged. The rally is narrow, and that narrowness matters for the currency. Foreign inflows into equities are real, yet they are largely concentrated in two stocks. The rest of the economy – and the export mix – is more diversified.
The naive read is that a surging stock market should attract foreign capital and strengthen the currency. The better market read involves three mechanisms.
First, hedging flows. Foreign investors buying Korean equities often hedge their FX exposure by selling the won forward. This neutralises the spot currency impact of the equity inflow. The net effect on the won can be negligible or even negative if hedging demand is strong.
Second, terms of trade. South Korea is a major importer of energy and raw materials. The AI boom has lifted commodity prices indirectly through higher electricity demand and supply chain reshuffling. Higher import costs widen the trade deficit, pressuring the won. The semiconductor export volumes are high, yet the value-added per chip is being competed down in some segments.
Third, policy divergence. The Bank of Korea has kept interest rates relatively low compared to the Federal Reserve and other central banks. The USD/KRW carry trade is unattractive, and the won has become a funding currency for some carry strategies. The BoK's cautious stance, focused on domestic growth and household debt, has not provided the rate support that would attract yield-seeking capital.
Geopolitical risk also plays a role. The won carries a Korean peninsula risk premium that does not affect the Kospi in the same way. Equity investors can diversify within the index. Currency investors cannot avoid the sovereign risk.
For the won to catch up to the Kospi, one of three things needs to change. A BoK rate hike would widen the interest rate differential and attract carry flows. A sustained improvement in the trade balance – beyond semiconductors – would reduce the structural demand for dollars. Or a broad-based equity rally that draws foreign inflows into non-tech sectors would increase unhedged demand for won.
None of these are imminent. The BoK is expected to hold rates steady at its next meeting, and the trade deficit is likely to persist as long as energy prices remain elevated. The Kospi's AI-fuelled rally may continue, yet the won will remain a laggard until the underlying macro and policy conditions shift.
For traders tracking the divergence, the next catalyst is the BoK monetary policy decision and the accompanying economic outlook. A hawkish surprise would be the clearest signal that the won is ready to close the gap. Until then, the Kospi and the won will continue to tell two different stories about South Korea's economy.
For more on how currency moves affect broader markets, see our forex market analysis and the currency strength meter for real-time positioning data.
Prepared with AlphaScala research tooling and grounded in primary market data: live prices, fundamentals, SEC filings, hedge-fund holdings, and insider activity. Each story is checked against AlphaScala publishing rules before release. Educational coverage, not personalized advice.