(Seoul=Yonhap Infomax) Sun Young Jung – The USD/KRW exchange rate has remained in the 1,460–1,470 won range, with diverging views on whether the global dollar trend will reverse next year.


While the USD/KRW rate and the global dollar index have shown decoupled movements, a sustained reversal to dollar weakness is seen as essential to alleviate the side effects of the current high exchange rate environment.


According to Yonhap Infomax daily trading data (screen number 2110) on the 26th, the USD/KRW rate faced upward pressure on most trading days in November, except for five sessions.


There were about six trading days where the intraday volatility exceeded 10 won. Notably, on November 14, when the foreign exchange authorities made verbal interventions and a fact sheet on US investment was released, the daily volatility reached 22.90 won.


With expectations rising for a ceasefire between Russia and Ukraine and potential rate cuts by the US Federal Reserve (Fed), anticipation for dollar weakness is growing. Whether the dollar will indeed weaken next year is likely to be a key determinant for the direction of the exchange rate.


Major institutions remain divided on the prospect of a dollar reversal in 2025. Oxford Economics (OE), in its outlook report, stated, “The dollar will remain strong through 2026,” citing the recovery of the US’s relative growth advantage as a driver for continued dollar strength.


OE also noted that “the sharp increase in Chinese banks’ net delta exposure to the dollar suggests stronger global demand and the potential for sustained dollar strength.” According to OE, this net delta exposure serves as a leading indicator for the dollar index, reflecting Chinese exporters’ FX hedging activities ahead of settlement.


OE explained that a rise in this indicator signals dollar strength amid increasing global demand, while a decline points to dollar weakness due to slowing demand.


With the rate-cutting cycle expected to conclude next year, fundamentals are set to regain importance. ING, in its 2026 annual FX outlook, said, “The Fed’s policy rate of 3.25% through March 2026 is already priced in, limiting the potential for dollar weakness.” However, ING also noted that continued short-term hedging of dollar exposure by investors would cap dollar strength.


ING added, “2026 will see more discussion about the neutral rate, and volatility in rates and FX is likely to decrease. Lower volatility could trigger renewed interest in carry trades.” The bank further commented, “Unlike 2024–2025, there will be no dollar-led trend. With rates returning to neutral and trade uncertainties rising, economic activity data will play a key role in driving currencies.”


Meanwhile, there is also a possibility that capital flows will continue to favor the US next year, rather than a full-fledged shift to dollar weakness.


Kwon A-min, FX economist at NH Investment & Securities, projected in the annual outlook that “the dollar index (DXY) in 2026 will follow a narrow, lower-then-higher trajectory.” Kwon cited factors such as expectations for Fed rate cuts, the end of quantitative tightening (QT), potential discussions on quantitative easing (QE), uncertainty over the next Fed chair, and the Supreme Court’s review of tariff constitutionality as possible sources of dollar volatility.


However, Kwon added, “Given the relative growth differential, capital flows are likely to return to the US, which will ultimately limit dollar weakness.”


syjung@yna.co.kr


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