Won Nears 1,500 Per Dollar Again as Oil Surge Lifts FX, Bond Yields

A fresh spike in Middle East-driven oil prices and renewed global inflation concerns sent the won and South Korean government bond yields sharply higher during trading. As crude surged, the won climbed back into the 1,490-per-dollar range for the first time in about five weeks. The yield on three-year government bonds rose as high as 3.7% intraday.

In Seoul foreign-exchange trading on May 13, the won finished daytime trading at 1,490.6 per dollar, 0.7 won weaker than the previous session. The currency had strengthened to 1,454 won on May 7, but moved back above the 1,490 level about five weeks later. It touched 1,499.9 won at around 10 a.m., threatening to breach 1,500.

The move followed a jump in oil prices as ceasefire negotiations between the US and Iran remained deadlocked. West Texas Intermediate crude for June delivery, which had fallen to $94.81 a barrel on May 4 on hopes for a ceasefire agreement, rose to $102.07 the previous day.

Foreign investors added to pressure on the won by selling about 3.7 trillion won ($2.67 billion) worth of shares on South Korea's benchmark stock market on May 13.

The dollar remained strong as expectations for Federal Reserve rate cuts faded amid high oil prices. US consumer prices rose 3.8% in April from a year earlier, the fastest pace in three years.

Still, the won may struggle to break above 1,500 per dollar for now, supported by a strong current-account balance and solid economic growth. "Unless oil rises above $120 a barrel, it will be difficult to break through 1,500," Park Sang-hyun, an analyst at iM Securities, said. If the deadlock in negotiations persists, the won is likely to trade in the upper 1,400s for the time being, depending on oil prices.

Bond yields also remained elevated. The yield on three-year South Korean government bonds ended trading at 3.635%, down 0.039 percentage point from the previous session, after rising above 3.7% earlier in the day. That was the highest intraday level since late November 2023, about two and a half years ago.

With economic growth holding up and inflation continuing to climb, the Bank of Korea is preparing to raise interest rates. Brokerages expect the central bank to deliver at least two rate increases in the current tightening cycle.

The government's emphasis on fiscal expansion a day earlier also added to upward pressure on yields. Citi said in a May 13 report that it expects the Bank of Korea to raise its benchmark rate four times in total. It projected that the government would sharply increase fiscal spending this year and next on the back of higher tax revenue, accelerating economic growth.

The yield on 30-year South Korean government bonds also briefly rose above 4% during the session. It ended trading at 3.968%, down 0.003 percentage point. "If the government budget increases significantly, net issuance of government bonds will not decline," Kim Myung-sil, an analyst at iM Securities, said. "The yield on three-year government bonds could rise to 3.8% to 4%."

Shim Seong-mi, Hankyung.com reporter smshim@hankyung.com