Surging USD/KRW Exchange Rate and US Treasury Yields: Impact of Prolonged Strong Dollar on the Domestic Economy

Resurgence of Macroeconomic Uncertainty and the Strong Dollar

As of June 28, 2026, the USD/KRW exchange rate has surged by more than 1% compared to the previous trading session, amplifying volatility in the foreign exchange market. The primary driver of this exchange rate escalation is the steep rise in US Treasury yields and the corresponding global trend of a strong dollar. Recent US inflation data exceeding market expectations has fueled concerns that the Federal Reserve's hawkish monetary policy will be prolonged, driving bond yields higher.

In particular, the 10-year US Treasury yield is facing upward pressure after breaking through major resistance levels, stimulating risk aversion and leading to the depreciation of emerging market currencies. The US Dollar Index (DXY) is also approaching its highest level of the year, evidencing the concentration of global capital in the US.

Structural Background of Rising US Treasury Yields

Inflationary Instability and the Fed's Policy Stance

The sell-off in the US bond market stems from disappointment that the pace of disinflation is falling short of expectations. As key inflation indicators, such as the core Personal Consumption Expenditures (PCE) price index, fail to stabilize below the Fed's 2% target, the onset of a rate-cut cycle is being delayed.

• Persistent Inflationary Pressure: Downward stickiness in housing and service sector prices has been confirmed, creating an environment where near-term monetary easing is unlikely.
• Treasury Issuance Burden: The continued large-scale issuance of government bonds by the US Treasury is exacerbating supply-demand imbalance concerns, further pushing up long-term yields.

Shift in Global Liquidity

As interest rate differentials widen, global capital is concentrating in US dollar-denominated assets that offer relatively stable and higher returns. This is a core factor increasing the pressure for capital outflows from emerging markets, including South Korea. Indeed, foreign investors have recently recorded massive net selling in the domestic stock market, restructuring their asset portfolios.

Ripple Effects of the Surging Exchange Rate on the Domestic Economy

Rising Import Prices and Burden on Domestic Demand

The depreciation of the won inevitably leads to a rise in import prices. Because South Korea has an economic structure highly dependent on energy and raw material imports, an exchange rate hike directly translates into increased production costs for businesses. This risks being passed on as higher prices for final consumer goods, diminishing households' real purchasing power and aggravating an overall slump in domestic demand.

Deteriorating Corporate Profitability and Foreign Supply-Demand Dynamics

For export-driven companies, a weaker won might partially aid in securing price competitiveness. However, under current conditions where concerns over a global demand slowdown persist, this effect is limited. Conversely, companies with a high ratio of dollar-denominated debt will face a surge in interest repayment burdens.

Furthermore, the flight of foreign capital due to concerns over foreign exchange losses increases the downward pressure on the domestic stock market. Major large-cap stocks, including semiconductors, have become targets of foreign selling, increasing the volatility of the KOSPI index.

Market Monitoring Points Going Forward

Whether the current phase of high exchange rates and high interest rates will be a short-term phenomenon or establish itself as a long-term new normal will be determined by the following key indicators.

• US Employment Reports and CPI: Upcoming major US macroeconomic indicators will directly influence the Fed's interest rate decisions.
• Bank of Korea's Policy Response: Attention must be paid to the Bank of Korea's monetary policy direction to defend against the widening US-Korea interest rate gap and inflationary pressures, as well as potential smoothening operations by foreign exchange authorities.

It is a time for market participants to adopt conservative risk management, preparing for macroeconomic uncertainty by avoiding excessive leverage, increasing cash reserves, or diversifying portfolios.