[Editorial] High Exchange Rates Expected Next Year as Well; Strengthening Economic Fundamentals Is the Only Solution

There are growing expectations that the high exchange rate, which has weighed on the Korean economy throughout this year, will persist into the next. According to projections compiled from 12 global investment banks, the average USD/KRW exchange rate is expected to be 1,440 won over the next three months, 1,426 won over six months, and 1,424 won over twelve months. These figures are about 100 won higher than the 1,330 won level estimated by the International Monetary Fund (IMF) as Korea’s appropriate exchange rate.
The continued outlook for a high exchange rate is largely due to the expectation that the interest rate gap between Korea and the United States will not be easily resolved. The US is maintaining a growth rate of around 2% thanks to robust consumption and investment, giving the Federal Reserve System (Fed) little incentive to rush interest rate cuts. In fact, most forecasts suggest that the Fed will only lower its policy rate once or twice next year, with the rate-cutting cycle likely ending after the third or fourth quarter. In contrast, although Korea’s growth forecast is similar to that of the US, its current policy rate is 1.25 percentage points lower.
As long as the interest rate gap between Korea and the US persists, domestic funds are likely to flow into US assets, which offer relatively higher returns and stability. If demand for dollar-denominated assets continues, it will be difficult to reverse the weak won and high exchange rate trend in the short term. On top of this, geopolitical uncertainties and global financial market volatility may further increase demand for the US dollar as a safe haven.
If the high exchange rate persists for an extended period, the Korean economy will face even greater burdens. Rising import prices will increase the costs of energy and raw materials, which in turn will drive up overall consumer prices and erode households’ real purchasing power. Heightened inflationary pressures will also constrain monetary policy, making it harder to stimulate the economy through interest rate cuts.
These burdens will also affect the corporate sector. In particular, small and medium-sized enterprises that rely heavily on imported raw materials may see their profitability deteriorate due to rising costs. Companies and financial institutions with high levels of foreign currency debt are exposed to exchange rate losses, which could undermine their financial soundness. While exporters may gain a short-term price advantage, the benefits are limited when considering slowing global demand and rising costs.
Recently, the government introduced a measure to reduce capital gains tax for individuals who sell up to 50 million won of overseas stocks and reinvest the same amount in domestic stocks next year. Earlier, it also requested cooperation from the National Pension Service (NPS) and exporters to help stabilize the foreign exchange market. These are direct efforts to encourage the repatriation of dollars held by individuals, companies, and pension funds. While such steps may help stabilize the exchange rate in the short term, their limitations as mid- to long-term solutions are clear.
Ultimately, the fundamental solution for exchange rate stability lies in strengthening the domestic economy’s fundamentals. A virtuous cycle must be established in which companies invest domestically, increase exports, and reinvest profits to continuously earn foreign currency, thereby stabilizing the foreign exchange supply and demand. To achieve this, institutional reforms across taxation, labor, and regulation are needed to foster an environment that encourages corporate investment and job creation. Expecting exchange rate stability without efforts to improve the economic structure is like building a house on sand.