Oil surge, bond shock, won wobble: Will the 1,300s hold? [Money Matters]

Foreign exchange authorities are closely watching the won-dollar rate as a sharp rise in oil prices pushes up long-term US Treasury yields. The surge in US bond yields is adding upward pressure to the won-dollar rate, which had been gradually stabilizing at lower levels, raising the prospect of greater exchange rate volatility ahead.

A senior official at the foreign exchange authority said Thursday that "if a surge in US long-term interest rates spreads to emerging markets and is accompanied by a rise in the term premium — the additional yield demanded on longer-maturity bonds — and a stronger dollar, negative effects could emerge," adding that authorities "are mindful of the possibility of increased volatility."

According to the Wall Street Journal, the yield on the 10-year US Treasury note climbed as high as 4.821 percent intraday on Wednesday (local time), its highest level in about two years and 10 months since Nov. 1, 2023. The 30-year yield has also remained above 5 percent for more than 55 consecutive days, extending its longest such streak since 2006.

The primary driver of the recent rise in long-term US Treasury yields has been a renewed surge in global oil prices. Higher oil prices stoke fears of inflation in the United States, raising the likelihood of further interest rate increases. That in turn reduces the investment appeal of Treasuries, pushing their prices down and yields up. Expectations that the US government may issue more bonds to stimulate an economy weakened by higher energy costs are also pulling yields higher.

Geopolitical tensions in the Middle East have escalated after the United States and Iran exchanged airstrikes again recently, sending global oil prices higher for three consecutive trading sessions. Brent crude futures for November delivery closed up 1 percent at $95.6 per barrel on the London ICE Futures Exchange on Wednesday (local time). West Texas Intermediate futures for October delivery also settled up 0.9 percent at $91 per barrel on the New York Mercantile Exchange. Both benchmarks hit their highest levels in about a month and a half.

Global oil prices had surpassed $100 per barrel immediately after the outbreak of the Iran war in March before gradually retreating to around $60 by May. They have since climbed back into the $90s amid stalled negotiations.

Rising US Treasury yields put upward pressure on the won-dollar exchange rate by boosting demand for the dollar as the greenback strengthens. The dollar index — which measures the dollar's average value against six major global currencies — stood at 99.6 on Wednesday, up 0.8 points over eight trading sessions from 98.8 on Aug. 21.

If the upward trend in US Treasury yields continues, the won-dollar rate, which has been stabilizing at lower levels in recent weeks, is expected to become more volatile. With strong forces pushing in both directions, uncertainty around the exchange rate is likely to rise.

The won-dollar rate had been on a downward stabilizing trend for the past two months. After hitting a weekly closing high of 1,555.8 won on July 2 — the strongest dollar reading since March 5, 2009, during the global financial crisis, when the rate reached 1,568 won — the rate fell steadily, dropping into the 1,360s on Monday for the first time in about 13 months.

The won-dollar rate fell further into the 1,350s intraday on Thursday. The last time the rate traded in the 1,350s during a session was July 4 last year, when it touched 1,358.2 won — about one year and two months ago.

The decline has been accelerating as South Korea posts record current account surpluses driven largely by semiconductor exports, while exporters have been flooding the spot foreign exchange market with dollars converted into won to meet tax payments and other obligations.

Consecutive interest rate hikes by the Bank of Korea's Monetary Policy Board have also supported won strength. The board raised the benchmark interest rate twice in July and August, lifting it by a combined 0.5 percentage points. The interest rate gap between South Korea and the United States — long cited as a key driver of won weakness — has narrowed from 1.25 percentage points to 0.75 percentage points.

However, the supply of dollars in the spot market could thin out early this month as SK hynix completes its American depositary receipt fund conversions and companies finish paying their interim corporate tax installments. If oil prices continue to rise in this environment, upward pressure on the won-dollar rate could intensify further.

Lee Min-hyuk, an economist at KB Kookmin Bank, said that "with major dollar-supply events such as SK hynix's ADR fund conversions and interim corporate tax payments wrapping up in early September, some bargain buying following the won's sharp short-term appreciation could trigger a partial rebound." He added, however, that "given the massive current account surplus and exporters' remaining capacity to sell dollars, any rebound is likely to be limited."