The won-dollar exchange rate fell below 1,400 for the first time in about 10 months. While long-term yields in major advanced economies such as the United States and Japan have surged recently, the dollar weakened in the short term as expectations spread that the U.S. Federal Reserve will not cut its benchmark rate as soon as September. Dollar selling by exporters also played a role.
In the Seoul foreign exchange market on the 19th, the won-dollar rate closed at 1,397.7, down 14.1 won from the previous session. It fell as low as 1,396.0 during the day. It was the first time the rate had dropped below 1,400 in about 10 and a half months, since October 2 last year. A pickup in dollar selling by both chipmakers and offshore traders drove the decline.
Analysts say the recent strength of the won runs counter to conventional macroeconomic wisdom. Normally, when U.S. Treasury yields rise, dollar assets strengthen and the won weakens. Indeed, the yield on the U.S. 30-year Treasury climbed to 5.31% on the 18th local time, its highest since 2007, while the 10-year yield rose to 4.73%. Japan's 10-year yield also rose to 2.945%, its highest level since 1996.
But the prevailing view in the market lately is that the rise in U.S. yields reflects "expanding risk" rather than "higher returns." The U.S. fiscal deficit for the 2026 fiscal year reached $1.799 trillion through July, already surpassing the previous year's full-year deficit of $1.775 trillion. Increased Treasury issuance and interest-cost burdens tied to the widening deficit are pushing up long-term yields.
"Rising rates do not mean higher returns; they reflect a demand for a premium on risk," said Lee Nam-kang, an economist at Korea Investment Holdings. Because exchange rates reflect countries' relative real returns rather than nominal rate levels, even if U.S. rates rise, growing fiscal and price instability may not translate into a stronger dollar, he explained.
South Korea's relative fundamentals are also supporting the won. Amid concerns over U.S. fiscal and price risks, Japan's fiscal burden and China's slowing growth, South Korea's exports and growth indicators remain solid, led by semiconductors.
Still, it is hard to see the recent strength of the won as structurally entrenched. Cho Yong-gu, senior researcher at Shinyoung Securities, said the dollar selling by chipmakers that has driven the recent decline has continued for more than a month and is entering a phase of exhaustion. "Rather than dropping below the mid-1,300s, the rate is more likely to form a short-term low around late August to September before rebounding to 1,400 or the low 1,400s," Cho said. Choi Kyu-ho, an economist at Korea Investment & Securities, also leaned toward the view that the rate would move around 1,400 for the time being and only stabilize in the high 1,300s toward the end of the year.
Ultimately, whether the won's strength persists is likely to depend on fundamentals such as chip exports. "Risks related to Iran have not yet been significantly reflected in domestic prices," Lee said. "If they show up in the price data, some of the recent decline may be reversed." This means that if a slowdown in the chip cycle and energy-driven inflation materialize, the relative conditions favoring the won could change.
The importance of economic fundamentals was also evident in recent yen intervention by the United States and Japan. Foreign exchange intervention by the two countries pushed the yen from 160 to 155 per dollar, but it later rebounded to around 159. Deutsche Bank noted that a currency's value is difficult to address through one-off market intervention.
Meanwhile, the won-yen cross rate fell as low as 876.64 won per 100 yen during the day, its lowest since July 17, 2024, when it stood at 870.97 won.
