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The first half of 3Q 2026 may be marking a shift in global foreign exchange markets. The USD rally that dominated after Operation Epic Fury appeared to be giving way to broad-based stabilization and notable recoveries by selected currencies. As of August 13, nearly all currencies posted positive returns against the USD, in sharp contrast to widespread depreciation in the first half of the year. The USD exceptionalism narrative waned after US GDP growth declined below 2% in 2Q26 and nonfarm payrolls turned negative in July, amid slower inflation readings in June-July due to lower global oil prices. Against this background, expectations for a September Fed hike have receded significantly, also due to the market’s disappointment with Fed Chairman Kevin Warsh’s fixation on ending forward guidance. 
Three Northeast Asian – KRW, JPY, and CNY – stood out.
The standout performer was the worst one in 1H 2026, the KRW. With a whopping 9% recovery since June, the KRW has turned positive for the year, with a modest 1.3% appreciation. Worries about soaring energy costs subsided after Brent crude oil prices fell to $70-100 per barrel, easing earlier panic that the Middle East conflict would drive prices to $150-200. South Korean chipmakers initiated domestic expansion plans to build AI infrastructure and semiconductor factories, prompting expectations that overseas USD earnings would be repatriated to fund these projects. On the back of solid GDP growth in the first half of the year, the Bank of Korea beat the Fed in raising interest rates, another factor attracting capital inflows into the KRW.
The CNY has been steadily appreciating since the start of the year due to targeted policy support and record trade surpluses. President Xi Jinping announced a goal of making the CNY a powerful global reserve currency, as best reflected in the spot USD/CNY rate consistently trading below its daily fixing. The European Union also increased its grievance over China maintaining its CNY artificially weak, giving Chinese exports an unfair advantage and exerting undue pressure on European industries.
Japan took a more aggressive and coordinated stance to defend the JPY. The joint US-Japan currency intervention in late July was the first since 1998 to lower USD/JPY from its four-decade low of 164. At its strongest point on August 3, the JPY wiped out this year’s losses. Despite the market’s scepticism about JPY’s recovery, it remains wary that Japan’s Ministry of Finance has become less restrained in its interventions, keeping an eye on the psychological 160 level, amid stronger market expectations that the Bank of Japan will hike before the Fed in September. US Treasury Secretary Scott Bessent also highlighted the risk to the US bond market from interventions by the world’s largest holder of US treasuries and concerns that unabated JPY weakness could trigger competitive depreciation across Asia.
Quote of the Day
“Being born in a stable does not make one a horse.”
Duke of Wellington
August 14 in history
The inaugural Summer Youth Olympic Games officially opened in Singapore in 2010, bringing together approximately 3,600 young athletes aged 14 to 18 from 204 nations.
Topic
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