Tension Rises in the FX Market…Key Variables to Determine the Won's Direction | Hong Seonae, Byeon Jeonggyu, Daiwa Securities Korea FICC Head [Yeouido Insight]

Summary

Byeon Jeong-gyu, FICC Head at Daiwa Securities Korea, discusses the recent sharp drop in USD/KRW and the key variables that will determine the won's direction. He attributes won strength to the narrowing Korea-US bond yield spread and a hawkish BOK, but sees a firm floor at 1,400. He also warns that yen weakness is structural and unstoppable, outlines a near-term caution on Korean chip stocks due to rising funding costs, views BOK gold buying as positive, and flags a yen carry-trade unwind risk from the second half of 2026.

• The Korean won is strengthening because the 10-year Korea-US government bond yield gap has almost disappeared, turbocharged by a hawkish BOK governor and dollar-position unwinding.
• USD/KRW may temporarily dip below 1,400 but the 1,400 level should be well-supported, supported by remaining dollar supply and the prospect of a BOK rate hike in October.
• Yen weakness is viewed as structural and cannot be halted by intervention, as Prime Minister Takaichi opposes rapid rate hikes and a massive consumption tax cut will keep rates low.
• A potential Fed rate hike in September would pressure risky assets by raising funding costs; this creates near-term headwinds for Samsung Electronics and SK Hynix despite solid long-term AI momentum.
• The Bank of Korea resumed gold purchases after 13 years for reserve diversification, which is seen as an encouraging demand factor for gold.
• Yen carry-trade unwinding is not imminent but investors should monitor the BOJ hiking path toward a 2% terminal rate, with a major liquidation risk emerging from H2 2026.
• The US using euros instead of dollars to defend the yen was a tactical move to avoid directly weakening the dollar given the euro's heavy weight in the dollar index.