Executive Summary
The KRW/USD exchange rate shows no signs of descending from the mid-to-high 1,400 won range. This is not simply a case of “the dollar being temporarily expensive.”
The core cause lies in the convergence of three factors:
- External Environment: A global landscape where dollar strength remains unyielding.
- Supply & Demand Imbalance: South Korea now spends more dollars (outward investment) than it earns (exports).
- Broken Formulas: The past mechanism where “strong exports equal a stronger won” has weakened (Decoupling).
For 2026, more important than the ‘direction’ of the exchange rate is the fact that the ‘floor has risen (Level Shift).’ The market has already accepted 1,400 won as the new standard.
※ The year-end exchange rate figures mentioned in this report (e.g., 1,442.68 won) are based on market data as of December 27, 2025.
1. From “Crisis Signal” to “New Baseline”
In the past, a rate of 1,400 won evoked memories of financial crises. However, throughout 2025, high exchange rates have transitioned from being ‘short-lived spike events’ to ‘sustained intervals,’ fundamentally changing the behavior of economic agents.
- Corporations: Have raised their baseline exchange rates for 2026 business planning. High rates are now treated as a constant in cost calculation, pricing, and investment decisions.
- Households: Are reducing overseas consumption (travel, direct purchases) or finding substitutes, while the preference for dollar assets in investment portfolios has strengthened.
- The Market: Focus has shifted from “returning to 1,300 won” to “managing risks at 1,450–1,500 won.”
This shift is a significant signal that the exchange rate is no longer perceived just as a matter of sentiment, but as a ‘structural issue’ of the Korean economy.
2. 12 Decisive Factors Supporting High Exchange Rates
The following 12 factors are not independent variables but are linked in a reinforcing loop: Dollar Strength → Risk Aversion → Capital Outflow → Won Weakness → Increased Hedging Demand.
| Category | Key Factor | Impact |
|---|---|---|
| External | ① Fed Rate Uncertainty | Delayed cuts sustain dollar appeal |
| ② US Exceptionalism | Global capital flocks to US growth/assets | |
| ③ US Policy Risks (Tariffs/Fiscal) | Inflation stimulus → Limits rate floor | |
| ④ China Slowdown & Weak Yuan | Won weakens in tandem (Proxy) | |
| ⑤ Geopolitical Risks | Deepens won selling during conflicts | |
| Supply | ⑥ Foreign “Sell Korea” | Stock sell-offs lead to dollar outflow |
| ⑦ Offshore Speculative Positions | Buying on dips supports the floor | |
| ⑧ Structural Outward Investment | Persistent demand for dollars (Retail/Pension) | |
| Structure | ⑨ Export-Exchange Rate Decoupling | Export earnings do not return domestically |
| ⑩ Rising Import Costs (Energy/Tech) | Lower “quality” of trade surplus | |
| Domestic | ⑪ BOK Policy Dilemma | Household debt limits rate response |
| ⑫ Delayed WGBI Effect | Actual inflows slower than expected |
Dollar Strength and Geopolitical Risks
1. Fed Rate Path Uncertainty: “Cuts may be slow and late”
If interest rate cuts are slower than market expectations, the high-yield appeal of dollar assets (cash/bonds) remains intact. Even if the Fed has begun cutting, lingering uncertainty about the pace means the won remains structurally inferior to the high-rate dollar.
2. US Exceptionalism: The ‘Dollar Vacuum’
The US continues to maintain relatively robust growth compared to other advanced economies, driven by Big Tech (AI) asset market strength. Global capital seeks both ‘growth’ and ‘safety,’ preferring US risk assets and the dollar. It is difficult for the won to be an exception when emerging market currencies are generally weakening.
3. US Policy Variables (Tariffs/Fiscal/Regulation)
The potential for strengthened protectionism, expanded tariffs, and fiscal policy changes by the next US administration could trigger import price hikes, stimulating inflation expectations. This limits the downside for US rates, creating conditions for dollar strength to extend ‘once more.’ This “Policy Uncertainty Premium” supports the dollar’s value.
4. China Slowdown & Weak Yuan: The Won as a ‘Proxy Currency’
In financial markets, the won still shows a high correlation with the yuan. If China’s deflationary pressure and export competition lead to a weaker yuan, depreciation pressure tends to transfer to the won.
5. Geopolitical Risk Premium (Korea/Taiwan/Ukraine/Middle East)
Geopolitical events shake exchange rates faster than fundamentals. Korea has high regional sensitivity and energy import dependence, making the won an easy target for the ‘sell basket’ during global risk-off phases.
Structural Capital Outflow
6. Foreign Portfolio Flows: Current Account Surplus is Not Enough
If foreign investors reduce their weight or sell off in the stock market, the dollar supply effect from the current account surplus is offset by the capital account deficit. The ‘Korea Discount’ stemming from concerns over industrial competitiveness or governance issues is being reflected in the exchange rate.
7. Offshore (NDF) Positioning & Technical Skew
Accumulated bets on won weakness (Long Dollar/Short Won) in the offshore market act as a technical support line around 1,400 won, preventing the rate from falling. This is not just a speculator issue but a result of spot supply imbalances combined with risk premiums.
8. Structural Dollar Demand: Overseas Investment by Individuals, Pensions, and Firms
- Individuals: Mass adoption of overseas stocks and ETFs (the “Seohak Ant” movement).
- Pension Funds: Increasing allocation to overseas assets to boost yields (Long-term strategy).
- Corporations: Rising overseas M&A and local facility investments. These trends act as persistent dollar buying demand (supporting the floor) rather than one-off events.
Weakened Link Between Exports and Exchange Rate
9. Decoupling of “Export Boom = Rate Drop” Formula
Even with strong exports (e.g., semiconductors), the exchange rate doesn’t fall because:
- Overseas Reinvestment: A growing portion of export earnings is used locally for operating funds or investments instead of being converted back to won.
- Dollar Retention: Firms increasingly prefer to hold dollars (cash/deposits) rather than convert them during uncertain times.
- Import Matching: Dollars are used directly for import settlements, not appearing as ‘dollar sell’ volume in the spot market (Natural Hedging).
10. Import Costs & Terms of Trade: The ‘Quality’ of Surplus
Even if export amounts rise, concurrent increases in imports of energy, raw materials, and advanced equipment limit the net trade surplus. In short, a solid net inflow (Current Account Surplus) sufficient to pull down the exchange rate may not be forming.
Policy Dilemma
11. The BOK’s Dilemma: Household Debt & Financial Imbalance
The Bank of Korea faces a dilemma: lowering rates stimulates the exchange rate, while raising them increases the burden on household debt and vulnerable borrowers. This ‘policy constraint’ makes market participants aware of the limited defense capability for the won, acting to raise the risk premium.
12. WGBI Inclusion: “Good News, But Not an Instant Cure”
Inclusion in the World Government Bond Index (WGBI) is long-term positive news that broadens the bond demand base. However, short-term exchange rate effects depend on: ① the timing of actual inflows, ② whether inflows are currency-hedged (hedging limits spot impact), and ③ investment attractiveness based on interest rate differentials. It is realistic to view it as a medium-term buffer rather than assuming “Inclusion = Immediate Rate Drop.”
3. 2026 Scenarios: Probabilities and Outlook
The outlook for 2026 is summarized as “1,400s as the baseline, with significant risk of breaking 1,500.” A return to the 1,200s seen in the past is highly unlikely.
2026 Scenario Probabilities
Status Quo, Limited Fluctuation (1,360 ~ 1,450 KRW)
Heightened Crisis, Overshooting (Breaking 1,500 KRW)
External Conditions Improve Rapidly (1,250 ~ 1,330 KRW)
Sustained ‘Box’ in 1,400s (60%)
- Premise: Fed rate cuts proceed but at a moderate pace, and Korea’s overseas investment dollar demand remains steady.
- Outlook: WGBI inflows will occur gradually, but due to structural dollar demand dominance, a box range centered on the 1,400s is expected. An attempt at the high 1,300s may occur if conditions improve in the second half.
Breaking & Settling Above 1,500 (30%)
- Premise: US rate cuts are delayed, or inflation re-ignites, applying upward pressure. Combined with a shock from China (hard landing/financial instability) or geopolitical crisis, and domestic financial instability (PF/secondary financial sector) spreading to a credit crunch.
- Outlook: A crisis period where the exchange rate “levels jump,” piercing through the 1,500 won line.
Drop to 1,300s (10%)
- Premise: US economic slowdown accelerates Fed cuts and dollar weakness begins in earnest. Simultaneously, economic sentiment in China/Asia stabilizes, and foreign risk appetite recovers, leading to capital rebalancing into the Korean market.
- Outlook: A hopeful path possible only if external conditions and supply/demand improve in tandem.
4. Checkpoints (Indicators to Watch)
To gauge the direction of the exchange rate in 2026, regularly monitor the following:
- US Indicators: DXY (Dollar Index), US 10-Year Treasury Yield, FOMC Dot Plot, and Expected Inflation.
- China Indicators: USD/CNH & USD/CNY trends, Chinese government stimulus & policy signals.
- Supply/Demand: Foreign net buying in KOSPI/Bonds, NDF positions, and Swap Basis.
- Energy Prices: Brent Crude, LNG, etc. (Impact on trade balance).
- Risk Indicators: Korea CDS Premium, Credit Spreads related to Project Financing (PF).
(Appendix) ‘FX Risk Management’ for Corporate Treasurers
Since “predicting” the exchange rate accurately is impossible, designing a defense for cash flow is crucial.
- Prioritize Natural Hedging: Match foreign currency inflows and outflows as much as possible (e.g., using export proceeds for import payments) and manage only the net position.
- Manage Residual Exposure: Use forward exchange or options for the remaining position, but a rule-based approach with split execution is practically more stable than hedging all at once.
- Note for Individual Investors:
- Foreign Currency Deposits: Exchange gains are tax-exempt, but interest income is taxable.
- Overseas Stocks/ETFs: Capital gains tax (22% after basic deduction) applies to trading profits, so emphasizing only exchange gains can be misleading.
