According to Capital Economics, the Korean Won could strengthen significantly over the next 18 months if the broader artificial intelligence stock rally collapses.

Elias Hilmer, a market economist at Capital Economics, stated that the bursting of an AI bubble would present two major headwinds for the US dollar. These include the Federal Reserve potentially cutting interest rates by 2028, and a slowdown in capital inflows that have been supporting the US stock market boom.

While semiconductor exports would also decelerate, South Korea is expected to continue maintaining a substantial trade surplus.

If the AI-driven stock market rally ends, the outflow of funds from South Korean retail investors into overseas assets could slow down or even reverse. This would likely lead to a significant correction in the current undervaluation of the Korean Won.

The currency is projected to appreciate by approximately 5% from current levels by the end of 2027. By the end of 2028, the Korean Won could strengthen by roughly 15%.

In the short term, the Korean Won is expected to remain under pressure as the Federal Reserve adopts a more hawkish stance and capital continues to flow out of the country.

Analysts predict the US central bank will raise interest rates three times by early 2027, each by 25 basis points. For South Korea, the AI export boom is anticipated to keep the economy strong, with monetary policy risks leaning towards further tightening.