The won-dollar exchange rate is in focus on the 16th as it attempts to break below the 1,340 won level, riding on dollar weakness stemming from a sharp drop in U.S. Treasury yields and a rebound in the New York Stock Exchange. According to Seoul Foreign Exchange Brokerage, the one-month won-dollar contract traded in the overnight New York non-deliverable forward (NDF) market was last quoted at 1,340.2 won. Factoring in the recent one-month swap point (-1.05 won), the exchange rate is expected to open approximately 3.35 won lower than the previous session’s close of 1,344.6 won (as of 3:30 p.m.).
Overnight in New York financial markets, safe-haven demand and dollar weakness emerged simultaneously. The Dollar Index fell below the 102 level, quickly retreating from the 18-month high it had recorded the previous day. The euro rose 0.56% against the dollar to $1.1218, while the yen gained 0.15% to 158.08 per dollar.
U.S. September Producer Price Index (PPI) rose 6.3% year-over-year, exceeding market expectations. This marked the largest increase since December 2022, suggesting inflation is spreading beyond energy-related items. September retail sales released the same day also rose 0.8% month-over-month, beating forecasts, but core retail sales excluding volatile components grew only 0.1%, leading to assessments that underlying consumption remains moderate.
Typically, strong inflation data would fuel rate hike expectations and drive dollar strength, but this time concerns over the financial health of artificial intelligence (AI) companies captured market attention. Wariness over the massive debt burdens carried by AI data center-related companies reignited, triggering safe-haven buying into U.S. Treasuries, which in turn pushed Treasury yields lower. The 10-year U.S. Treasury yield fell to around the 5.09% level.
Expectations surrounding the Federal Reserve’s monetary policy path also lent support to dollar weakness. After September Consumer Price Index (CPI) data released the previous day rose 3.7% year-over-year, exceeding market expectations of 3.6% and highlighting the possibility of additional rate hikes, sentiment shifted following cautious remarks from senior Fed officials. Vice Chair Michael Barr and San Francisco Fed President Mary Daly both signaled that there is time to assess the situation.
According to CME FedWatch, the probability that the Fed will hold rates steady at its upcoming meeting on the 27th-28th stands at 73%, up sharply from 53% a month ago.
Juan Perez, head of trading at Monex USA, said, “A perception is spreading that the current inflation rate and its pace of increase are unsustainable, and bearish views on the dollar are gaining traction.” He added, “With recession concerns dominating market sentiment, the market is tilting toward dollar selling after four weeks of sharp dollar strength.”
Joel Kruger, market strategist at LMAX Group, commented on the flow of funds into U.S. Treasuries driven by AI-related debt concerns: “If the rise in Treasury yields does not persist and selling continues during the dollar’s upswing, the perception will strengthen that most inflation factors are already priced into the market.” He added, “In that case, the market’s balance could shift in a direction favorable to risk assets.”
However, the downside for the won-dollar exchange rate may be limited. Given the elevated U.S. inflation rate, it is difficult to completely rule out the possibility of additional Fed tightening. If foreign investors continue their net selling trend in the South Korean stock market, renewed pressure for won weakness could emerge.
Conversely, dollar-selling flows from exporters backed by strong semiconductor exports are expected to act as a factor capping any upside in the exchange rate. The recent dollar supply surplus in the South Korean foreign exchange market, combined with global dollar weakness, forms a structure that supports further declines in the exchange rate.
Market participants are watching remarks from Fed Chair Jerome Powell to gauge the central bank’s next move. Uto Shinohara, senior investment strategist at Mesirow Currency Management, said, “The Fed is about to enter a blackout period ahead of the upcoming FOMC meeting, during which officials refrain from public comments, and no major economic data releases remain before the meeting.” He added, “Market direction is likely to be driven by geopolitical uncertainty surrounding Russia-Ukraine and Iran, as well as AI-related developments.”
