Drivers of the South Korean Won's Strength and the US Dollar's Weakness, and the Impact of Central Bank Intervention

1. Drivers of the South Korean Won’s Strength
   • The Korean authorities’ intervention signal is the direct trigger: The South Korean Ministry of Economy and Finance issued a warning via Yonhap News Agency, stating that “excessive depreciation of the won is undesirable” and expressing its “firm commitment to stabilizing the won” [1]. This signal boosted market confidence in the won’s stability, curbed short-term speculative selling, and pushed the USD/KRW exchange rate down 1.1% from an early morning level of 1,482.11 won to 1,463.28 won [1].
   • Macro backdrop of US dollar weakness: The 2025 US Dollar Index (DXY) fell by approximately 9.9% for the full year, marking its largest annual decline since 2017, and is currently at an 11-week low [2], providing a favorable external environment for the won’s strength.

2. Reasons for US Dollar Weakness
   
   Investors widely expect the Federal Reserve to cut interest rates twice more in 2026; this “dovish” expectation has depressed dollar demand [2]. As market expectations for a shift in US monetary policy to easing grow stronger, the dollar’s safe-haven appeal has declined, further exacerbating its weakening trend.

3. Impact of Central Bank Intervention on Asian Currency Valuations
   • Short-term impact: Intervention signals or actual interventions usually temporarily strengthen the local currency, as the Korean authorities’ warning has directly pushed the won higher.
   • Long-term impact: The effectiveness of intervention depends on factors such as market liquidity and the credibility of the authorities’ policies. If the Korean authorities only release signals without taking substantive measures, the sustainability of the won’s strength is questionable.
   • Regional linkage: The won’s strength may drive synchronous gains in other Asian currencies (such as the Japanese yen), but policy divergence among central banks in various countries may limit the linkage effect.

• The Korean authorities’ intervention signal effectively influenced market sentiment in the short term, indicating that policy credibility plays an important role in exchange rate fluctuations.
• The long-term trend of the US dollar’s weakness is closely related to expectations of Federal Reserve rate cuts, and this macro factor will continue to affect the trends of Asian currencies including the won.
• The effect of central bank intervention is uncertain; attention should be paid to subsequent policy implementation and market reactions to policies.

• Risks
  : The short-term effect of central bank intervention may be digested by the market. If US economic data are stronger than expected or expectations of Federal Reserve rate cuts weaken, the dollar may rebound, putting Asian currencies such as the won under depreciation pressure. In addition, if the Korean authorities take excessive intervention measures, it may trigger speculative counterattacks.
• Opportunities
  : The weakening of the dollar provides room for appreciation of Asian currencies. If South Korean economic data (such as semiconductor exports) improve, the trend of the won’s strength may continue. At the same time, the weakening of the dollar helps reduce import costs and external debt burdens for Asian countries.

This report comprehensively analyzes the drivers of the won’s strength and the dollar’s weakness, including the Korean authorities’ intervention signals and expectations of Federal Reserve rate cuts, and assesses the potential impact of central bank intervention on Asian currency valuations. The report emphasizes the important role of policy credibility and macroeconomic expectations in the exchange rate market, while pointing out the uncertainty of the effect of central bank intervention. Investors should pay attention to subsequent policy developments and changes in economic data to evaluate the sustainability of exchange rate trends.