Capital Economics: AI bubble burst may cause Korean won to appreciate by 15% within 18 months

Source: Global Market Report

According to Capital Economics, if the broader AI stock rally collapses, the Korean won could strengthen over the next 18 months.

Capital Economics market economist Elias Hilmer stated that an AI bubble burst would present two major headwinds for the US dollar: the Federal Reserve could cut rates as early as 2028, and capital inflows that support the US stock market rally may slow.

Although semiconductor exports would also slow, South Korea would still maintain a significant trade surplus.

If the AI-driven stock market rally ends and the outflow of overseas funds from Korean retail investors slows or even reverses, the current undervaluation of the won could see a significant correction.

It is expected that by the end of 2027, the won will rise about 5% from current levels. By the end of 2028, the won could appreciate by around 15%.

In the short term, with the Federal Reserve taking a more hawkish stance and continued capital outflows, the won will remain under pressure.

The Federal Reserve is expected to hike rates three times by early 2027, each by 25 basis points; as for Korea, the AI export boom is projected to keep the economy strong, and monetary policy risks are tilted toward further tightening.