I’ve noticed a surge in traffic from South Korea lately. Therefore, I put together this analysis on the USD/KRW exchange rate with Korean readers in mind. I hope to offer a more structural take on what’s really moving the currency.
Date of Preparation: Late April 2025
Forecast Horizon: June 2025 – June 2027
1. Introduction: Why Structural Interpretation of the Exchange Rate Is Now Essential
As Korea’s snap presidential election is confirmed for June 2025, the USD/KRW exchange rate structure is undergoing a fundamental shift. This is not merely a reaction to interest rate differentials or technical patterns. It is a structural repositioning of capital based on institutional trust and political transitions. The strong prospects of Candidate A’s victory have triggered anticipatory reactions from foreign investors. They, along with domestic exporters and importers, are reorienting their behavior. Financial institutions are also adjusting their strategies based on perceived regime risk.
Currency markets in emerging economies often react more violently to institutional risk. This reaction is more intense than to interest rates or current account flows. At this juncture, it is essential to track the underlying narrative shift. It is also crucial to track policy credibility and capital flow mechanics, not just headline data. This report adopts the Hoho-style 2.0 framework to analyze these dynamics—emphasizing capital P&L structures, forced flows, and systemic stress signals—to forecast the USD/KRW path over the next two years.
2. Causal Layer 1: Shifts in Policy Narrative and Political Risk
2.1 Asymmetric Monetary Policy
The U.S. Federal Reserve, under the inflationary pressure of the Trump 2.0 tariff regime, is maintaining its benchmark rate at 4.25–4.50%. Meanwhile, the Bank of Korea has cut its rate to 2.75% and signaled a prolonged hold. This creates a sustained 150bp+ interest rate gap between Korea and the U.S., incentivizing outflows of capital and reinforcing KRW depreciation pressures.
However, in the current structural context, investors are less concerned with yield differentials and more with FX P&L volatility. The dollar carry trade remains attractive, and Korean institutions continue to accumulate unhedged USD assets—reducing domestic KRW liquidity and amplifying currency risk asymmetry.
2.2 Structural Implications of the Snap Election
The 2025 election is not just a political event—it is a regime stress test. If Candidate A wins, the market anticipates a breakdown in three core areas:
- Capital controls (e.g., tighter forex approvals, restrictions on outbound investments)
- Fiscal expansion, triggering higher sovereign bond issuance and bond market instability
- Credibility erosion in foreign exchange policy and lack of policy consistency
These are not speculative risks—they are being actively priced into the market. Foreign investment banks are already revising their USD/KRW forecasts upward, with many projecting 1,500 or above.
3. Causal Layer 2: Structural Drivers of Exchange Rate Pressure
3.1 Interest Differentials and Carry Trade Mechanics
Interest rate gaps are not merely spread metrics—they reflect divergent liquidity risk. U.S. dollar assets offer both high yield and a liquidity premium, making them structurally preferable. Korean insurers, pension funds, and banks are maintaining unhedged USD positions due to high hedging costs, effectively creating a structural short position on the KRW.
3.2 REER Discount vs. Capital Flight Risk
While Korea’s Real Effective Exchange Rate (REER), per BIS data, is roughly 4.5% undervalued relative to its 10-year average, this valuation signal is irrelevant in the face of political risk. As seen in EMs during 2022–2023, trust collapse overrides valuation logic. REER discounts may attract long-term capital, but they repel speculative or risk-sensitive flows during instability.
Meanwhile, the 5-year NDF is priced around 1,385, suggesting that some institutional investors expect long-term stabilization. Yet, this expectation remains unrealizable under current CDS and risk reversal signals.
3.3 Options and CDS Market Warnings
Risk reversals for 1M and 3M USD/KRW options are above +2.5vol, showing that investors are mainly hedging against KRW weakness. This one-sided demand for USD call options reflects fear of sudden depreciation.
Meanwhile, Korea’s 5-year CDS is at 35.34bp—low by global standards, but not low enough to suggest full trust in policy. It doesn’t signal a credit crisis, but it shows markets are still cautious.
The contrast is clear: credit risk looks stable, but policy risk feels high. Investors aren’t worried about Korea’s ability to pay—they’re unsure about what the government might do next.
This mismatch tells us something important: capital moves on trust in policy, not just numbers.
4. Causal Layer 3: Scenario Tree and Expected Exchange Rate
Scenario A: KRW Appreciation (10% Probability)
Assumptions:
- Fed cuts rates to 2.5% or lower
- Candidate A pivots to centrist, market-friendly policies or loses to Candidate B
- Global risk appetite rebounds, EM flows return
Structural Implications:
- Re-entry of foreign capital into equities and bonds
- Exporters accelerate KRW conversion
- CDS and options markets normalize
Exchange Rate Path:
- Strong support near 1,350; 1,320 achievable in short term
- Authorities may attempt to cap appreciation
Scenario B: Stabilized Range (40% Probability)
Assumptions:
- Candidate A wins, but policy disruption is delayed
- Verbal interventions from authorities stabilize sentiment
- Exporters stagger conversions based on price bands
Structural Implications:
- Partial stabilization, hedging funds may cautiously reenter
- CDS and RR stay elevated but contained
- No major drawdown in FX reserves
Exchange Rate Path:
- Range-bound between 1,380 and 1,430; central value near 1,400
Scenario C: Renewed KRW Weakness (50% Probability)
Assumptions:
- Post-election policy triggers FX restrictions and fiscal blowout
- Foreign capital exits accelerate
- FX defense breaks at 1,460; panic buying ensues
Structural Implications:
- Surge in USD call demand in options markets (RR > +3.0)
- CDS breaches 90bp; offshore borrowing limits tighten
- Importers expand NDF-based pricing mechanisms
Exchange Rate Path:
- 1,500 breached; failure to intervene could test 1,550
- Widening gap between NDF and spot market
Expected Exchange Rate (E[USD/KRW])
E = (0.10 × 1350) + (0.40 × 1400) + (0.50 × 1550) = 1,470 KRW
5. Causal Layer 4: Implications for Real Economy and Financial Strategy
Exporters
- Scenario C: Revenue boost, but delayed conversion due to volatility
- Scenario B: Hedge strategies centered around 1,400
- Scenario A: Price setting via NDFs or put options to guard downside
Importers
- Scenario C: Margin squeeze → structured hedging essential (call options + forwards)
- Scenario B: Delay settlements, smooth cost exposure
- Scenario A: Margin expansion → cost competitiveness opportunity
Financial Institutions / Pension Funds / Insurers
- Scenario C: Prioritize USD liquidity and unhedged dollar asset accumulation
- Scenario B: Tactical hedging, rollover as costs normalize
- Scenario A: Shift toward KRW bonds and EM exposure
6. Structural Monitoring & Risk Triggers
Conditions that warrant scenario revision:
- CDS > 80bp + RR > +2.5 → Raise Scenario C probability above 60%
- Candidate A leads by >10pp + capital outflows observed → C becomes base case
- 5Y NDF vs. Spot spread > 3% + FX reserves < $400bn → Policy credibility crisis
- USD/KRW stays >1,480 for 3+ days → Options volatility spike, rollover margin calls
7. Conclusion: Exchange Rate Is the Shadow of Structure
The 2025 snap election is not merely a political event—it is a turning point for Korea’s currency structure. The exchange rate must be read not as a price, but as a structural reflection of trust, policy coherence, and forced flows.
Ultimately, the question is not whether the dollar is cheap or expensive.
It is: Who is losing money, and who is being structurally forced to act?
- FX authorities must focus on restoring policy credibility, not just intervening.
- Real economy actors must shift from “directional bets” to “extreme risk mitigation” frameworks.
Exchange rates are no longer numbers—they are battlegrounds of structural survival.
HOHO-ECONOMICUS Insight 
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