Dollar selling accelerates as 1,400 won level collapses… exchange rate hits lowest in 11 months

The won-dollar exchange rate finished trading for two consecutive days in the 1,300 won range. Amid a weakening dollar driven by falling U.S. long-term bond yields and increased selling of dollars by export companies, the collapse of the psychological support level at 1,400 won triggered a chain reaction of additional dollar selling.

On the 20th, in Seoul's foreign exchange market, the won-dollar exchange rate closed weekly trading down 5.1 won from the previous session at 1,392.6 won. This marks the lowest level since September 23 last year (1,392.6 won), approximately 11 months ago based on weekly closing prices.

On this day, the exchange rate opened down 8.7 won from the previous day at 1,389.0 won and fell to the mid-1,380 won range early in trading. Later, low-price buying demand, including settlement needs from import companies, flowed in, partially reversing the decline.

The dollar index, which reflects the value of the U.S. dollar against six major currencies, moved around 98.83 as of 3:26 p.m.

The direct background for the exchange rate decline is a global dollar weakness caused by falling U.S. long-term bond yields. The U.S. Treasury Department announced that starting September 9 and continuing through November 4, it will expand its liquidity support buyback program for 10–20-year and 20–30-year Treasury bonds from a maximum of $2 billion per session to a minimum of $4 billion per session in response to the sharp rise in long-term bond yields.

The market interpreted this as a signal that the U.S. Treasury would no longer tolerate a sharp spike in long-term rates. The yield on 30-year U.S. Treasuries, which had surged to a post-2007 high of 5.337%, fell sharply following the announcement. Expectations grew for narrowing interest rate differentials between the U.S. and major economies, leading to strength in the euro and pound while the dollar turned weak.

Min Kyung-won, an economist at Woori Bank, explained: "The market viewed this as a signal that the U.S. Treasury would no longer tolerate further spikes in long-term rates, causing U.S. long-term bond yields to fall. As interest rate differentials with the U.S. narrowed, major currencies such as the euro and pound strengthened, while the dollar weakened."

The minutes from the July Federal Open Market Committee (FOMC) meeting also failed to reverse the trend of a weakening dollar. Although many participants assessed that additional tightening would be necessary if inflation did not slow down, the minutes did not contain significantly more hawkish content than market expectations.

From the perspective of domestic supply and demand, negotiation volumes from export companies centered on semiconductor firms pulled down the exchange rate. The previous day, despite foreign investors making large-scale net sales of stocks in the domestic stock market, export company negotiations and offshore dollar selling overwhelmed this trend, pushing the won-dollar rate below 1,400 won for the first time in about 10 months.

Analysts suggest that as the exchange rate has fallen rapidly, investors' direction in the foreign exchange market is shifting from buying dollars to selling them. The exchange rate dropped from the mid-1,500 won range at the beginning of last month to the 1,300 won range within about a month, and with even the psychological support level of 1,400 won collapsing, dollar selling pressure has intensified.

Min, the economist, stated: "Large volumes of negotiation orders from export companies aimed at raising won funds flowed in, coinciding with a weakening dollar. With the psychological support level of 1,400 won also collapsing, there is a possibility that the decline in the exchange rate could trigger additional dollar selling, creating a self-reinforcing downward trend."