Won Weakens as WGBI Dollar Inflows Pause

The Korean won fell to the upper 1,350 range against the U.S. dollar as a month-end supply gap combined with broad dollar strength. Foreign investors' net selling of local stocks and a weaker yen added to the pressure on the won.

The won closed at 1,358.4 per dollar in the Seoul foreign exchange market on the 1st, up 5.6 won from the previous session. The currency weakened to the 1,363 range early in the day before paring losses.

The main driver was a drop-off in dollar selling that had been concentrated at the end of the month. Dollar sales tied to the World Government Bond Index (WGBI) slowed, while exporters' dollar-selling volume also came in lower than the previous session, according to market sources.

Foreign investors, by contrast, were net sellers of Korean stocks, adding to dollar demand.

Global dollar strength also underpinned the won's decline. While the U.S. personal consumption expenditures (PCE) price index for August came in below market expectations, second-quarter gross domestic product growth was revised sharply higher to an annualized 2.2% from 1.5%, highlighting the resilience of the U.S. economy.

The 10-year U.S. Treasury yield rose as high as 5.307% during the session, its highest level since June 2007, lending further support to the dollar.

The weaker yen was another drag on the won. The dollar climbed to the 158 yen range, pulling down the won, which has tracked recent moves in the Japanese currency closely.

Still, some market watchers expect further gains in the dollar-won rate to be limited, as exporters may step in to sell dollars at higher levels. Exporters that held off on selling during the month-end decline still have volume to unload, and strong exports continue to supply dollars.

"Along with U.S. interest rates and the global dollar trend, WGBI-related flows look set to determine the direction of the exchange rate early this month," one market participant said.