U.S. Treasury yields climbed to their highest levels since 2007 over South Korea's Chuseok holiday and the dollar strengthened, renewing downward pressure on the won. Inflation worries stemming from the Middle East combined with the Federal Reserve's hawkish stance and unease over U.S. bond supply. With foreign investors also selling Korean stocks, the won-dollar exchange rate rose into the 1,360 range on the 28th.
The won finished at 1,365.10 per dollar in Seoul that day, up 7.6 won from the previous session's close. The exchange rate had slipped to the 1,355 range early in the session but extended gains in the afternoon, touching 1,365.50 at one point. Dollar-selling by exporters at the end of the quarter capped the upside, but demand for dollars grew as foreign investors stepped up sales of Korean shares.
The climb in U.S. Treasury yields accelerated during the holiday. According to the Bank of Korea's overseas offices, the two-year Treasury yield stood at 4.85% as of the 25th, up 0.51 percentage points from the end of the previous month, while the five-year yield was 4.99%, up 0.49 percentage points, the 10-year yield 5.16%, up 0.41 percentage points, and the 30-year yield 5.49%, up 0.25 percentage points. The five-, 10- and 30-year yields were the highest since 2007.
The rise reflected a mix of factors: inflation concerns tied to tensions in the Middle East, the Fed's hawkish stance and the burden of Treasury supply. Expectations for rate cuts weakened after the September Federal Open Market Committee meeting, as officials continued to leave open the possibility of further increases. Buying sentiment for bonds also weakened after a Treasury buyback came in at $4.08 billion, short of its $6 billion cap, and a five-year auction drew weak demand.
Views are split over whether the surge in U.S. yields will persist. JPMorgan, Goldman Sachs and Citi pointed to greater volatility driven by supply pressure and position unwinding, while Bank of America and Citadel cited structural upward pressure on yields from expanding investment in AI infrastructure. TD Securities put fair value for the 10-year yield at 4.25% to 5.25%, saying current levels have moved close to the upper end, and HSBC said there is room for yields to decline over the medium term.
Some in the currency market expect volatile trading to continue for now as domestic supply and demand interact with U.S. yields and the dollar. Exporters' month-end dollar sales should limit the upside for the exchange rate, while high U.S. Treasury yields and foreign selling of Korean stocks could support the downside. One foreign exchange market official said U.S. yields have risen quickly in a short period, increasing pressure for a stronger dollar, but added that factors that could pull the exchange rate lower, including month-end dollar sales by exporters and negotiations in the Middle East, are present as well. The official said the currency could fluctuate in the 1,350 to 1,370 range for some time, depending on external variables and supply and demand.
