The Korean won-dollar exchange rate closed lower, pressured by expectations of a Federal Reserve rate hold in September, foreign stock buying, and exporter dollar settlements. However, the decline was partially reversed in the afternoon as the KOSPI turned sharply lower.

On August 18, the won-dollar exchange rate in the Seoul foreign exchange market closed at 1,411.80 won, down 1.20 won from the previous session’s close of 1,413.00 won. Based on the 3:30 p.m. benchmark rate, this marks the lowest level since October 2 of last year (1,400 won). The rate opened at 1,417.00 won before immediately turning lower, and at around 12:06 p.m. it fell to 1,408.00 won, the lowest level in 11 days since the 7th (1,407.30 won).

The dollar index, which measures the greenback against six major currencies, stood at 99.68 as of 3:22 p.m., up from the previous session’s 99.64. The fact that the won strengthened even as the dollar index rose suggests that domestic supply-demand factors played a significant role.

Growing expectations of a Federal Reserve rate hold in September exerted downward pressure on the exchange rate. Following the previously released U.S. Consumer Price Index (CPI) and Producer Price Index (PPI), July retail sales also came in below market expectations, reinforcing the hold outlook. U.S. July retail sales fell 0.6% month-over-month, significantly undershooting the market forecast of a 0.1% increase.

Alongside dollar weakness, domestic supply-demand dynamics also drove the won-dollar rate lower. Foreign investors bought a net 91.4 billion won (approximately $64.7 million) worth of shares on the KOSPI market, marking a fifth consecutive session of net buying. Custodial dollar selling tied to foreign stock purchases was compounded by exporter dollar settlements.

However, the exchange rate pared its decline as the stock market turned sharply weaker in the afternoon. The KOSPI, which had risen more than 2% in early trading and climbed as high as 7,216.62 in the morning, reversed course in the afternoon and ultimately closed at 6,869.83, down 108.11 points (1.55%) from the previous session. The KOSDAQ also plunged 30.45 points (3.52%). Market participants noted that while foreign stock buying and exporter settlements drove the exchange rate lower in the morning, dollar buying flowed in during the afternoon as risk appetite weakened.

Rising U.S. Long-Term Yields and Geopolitical Uncertainty

Externally, Middle East-driven geopolitical uncertainty and rising U.S. long-term yields remain factors constraining won strength. The 60-day negotiation deadline under the ceasefire memorandum of understanding (MOU) signed between the United States and Iran in June expired on the 17th without tangible results, heightening concerns that the diplomatic track has reached an impasse.

Rising U.S. long-term Treasury yields are also capping the exchange rate’s downside. On the 17th (local time), the U.S. 30-year Treasury yield surpassed 5.31% intraday, the highest level in approximately 19 years since June 2007. The 10-year yield also climbed to 4.728%.

Long-term Treasury yields rise when expectations of future inflation dominate. When inflation erodes the value of money, longer-maturity bonds suffer greater losses, so higher yields are needed to sell them. The concern is that the 5%-level yield on U.S. Treasuries—a safe-haven asset—could trigger capital outflows from South Korea’s bond and equity markets.

If foreign investor funds shift from South Korea to the United States, domestic bond yields would rise. This would make corporate financing more difficult and reduce household consumption capacity, potentially weighing on South Korea’s economic growth. Additionally, a wave of foreign selling in the domestic stock market would deal a heavy blow to share prices. The dollar conversion demand generated in this process is expected to add further upward pressure on the exchange rate, reinforcing dollar strength.

Impact on Bank of Korea Policy

With the won’s recent strength persisting, analysts suggest the exchange rate is exerting growing influence on the Bank of Korea’s monetary policy. In a report released on the same day, Barclays noted that the won has shown the strongest performance among major currencies since July, stating that “it is likely to become a more important factor for Bank of Korea policy than before.”

According to Barclays, won strength lowers import prices and financial stability risks, but simultaneously weakens the Bank of Korea’s “income-based growth” rationale. The bank particularly noted that since the exchange rate has a greater impact on Gross Domestic Income (GDI) than on Gross Domestic Product (GDP), won strength could dilute the income gains from improved terms of trade.

Barclays estimated that depending on the exchange rate level, first-quarter GDP growth could be 0.08–0.18 percentage points lower, second-quarter growth approximately 0.20 percentage points lower, and second-quarter GDI growth could decline by 0.50–2.00 percentage points depending on exchange rate assumptions.

The impact of won strength on corporate earnings is also expected to be uneven. The IT sector, with its steep earnings improvement trajectory, faces limited impact, but the non-IT sector, where earnings recovery has been slower, could face greater foreign currency translation losses from won strength. Barclays projected that non-IT companies would bear 66% of total KOSPI foreign currency translation losses in the third quarter.

Conversely, some analysts argue that a rising exchange rate would constrain the Bank of Korea’s monetary policy. A higher exchange rate raises import prices, which could re-stimulate domestic inflation and make it harder for the central bank to cut its benchmark rate. Market participants expect U.S. Treasury yield movements to be influenced by U.S.-Iran negotiations. While U.S. national debt, massive Treasury issuance, and inflation concerns have all played a role, analysts attribute the recent surge to President Donald Trump’s “bombing Oman” remarks.

With won strength and rising U.S. long-term yields pulling in opposite directions, the future direction of the exchange rate has become increasingly uncertain. In the short term, foreign investor flows and exporter settlements are likely to support won strength, but if U.S. Treasury yields rise further or Middle East tensions escalate, dollar buying could flow in rapidly. For the Bank of Korea, the policy calculus has grown more difficult: won strength is favorable for price stability but could weaken growth momentum.