The KOSPI index has fluctuated between 9,000 and 5,000 for the first time in a month, reflecting increased volatility in the domestic stock market. However, in the foreign exchange and bond markets, improvements in dollar supply and a preference for safe assets have led to a simultaneous decline in exchange rates and yields.
On August 3, the exchange rate of the Korean won against the U.S. dollar closed at 1,429.8 won in the Seoul foreign exchange market. The rate had surged to 1,559.2 won during trading on July 1, but has since dropped to the 1,420 range. Throughout July, the exchange rate fell by 125.4 won, marking the largest monthly decline since March 2009 during the global financial crisis. Notably, on July 30, the rate dipped to 1,418.0 won, the lowest level in nine months since October 20 of the previous year.
The improvement in dollar supply, previously cited as a reason for the high exchange rate, has contributed to the strengthening of the won. Funds from SK Hynix's American Depositary Receipts (ADRs) have flowed in, and export companies have been selling dollars, further driving down the exchange rate.
Foreign investors had been consistently selling in the domestic stock market. However, as stock prices surged in a short period, they began to rebalance their portfolios, increasing downward pressure on the won. Yet, from August 8 to 31, foreign investors turned to net buying, accumulating 6.1123 trillion won in the securities market, alleviating the downward pressure on the won.
It is also believed that market interventions by the foreign exchange authorities of South Korea, the United States, and Japan supported the won's strength. On July 30, the won-dollar exchange rate fell sharply below 1,420 won, coinciding with a similar decline in the yen-dollar exchange rate, attributed to coordinated interventions by the three countries' authorities. Some analysts predict that the exchange rate could enter the 1,300 range in the second half of the year. Moon Da-woon, a researcher at Korea Investment & Securities, stated, "Demand for currency exchange for corporate tax prepayments and a slowdown in the U.S. economy are expected to lead to a trend of a weaker dollar."
At the same time, bond yields have rapidly decreased. The perception of a peak in interest rates, coupled with a sharp drop in international oil prices and increased volatility in the stock market, has led to heightened demand for safe assets. According to the Korea Financial Investment Association, the yield on three-year government bonds rose to 3.959% on July 24 but has since declined, reaching 3.758% on July 31, a drop of 20.1 basis points (1 basis point = 0.01 percentage points). During the same period, the yield on ten-year government bonds fell from 4.447% to 4.261%, a decrease of 18.6 basis points.
The market attributes this decline in yields to the resolution of some uncertainties following the Bank of Korea's expected interest rate hike. The perception that the central bank would not pursue further tightening after the rate increase had already been factored in, leading to an influx of bond buying.
Looking ahead, short-term bonds are expected to have additional room for decline as the market has largely priced in interest rate hikes and domestic and external uncertainties in August. In contrast, long-term bonds may see limited declines due to robust economic trends, expansionary fiscal policies, and rising long-term U.S. Treasury yields. Kim Sung-soo, a researcher at Hanwha Investment & Securities, noted, "The yield on three-year government bonds is expected to decline again as the Monetary Policy Committee meeting at the end of this month approaches. For long-term bonds, given the solid growth, proactive fiscal measures, and rising global long-term interest rates, it is appropriate to keep the upper limit for ten-year government bonds at 4.70%."
* This article has been translated by AI.
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