3-Year Government Bond Yield Rises by 7.7bp Despite Strengthening Won

The dollar-won exchange rate fell by 163.20 won after a month, but the 3-year government bond yield rose by 7.7bp during the same period. The trend of the strengthening won leading to a decline in bond yields has weakened, resulting in a situation where the exchange rate and yields are sending different signals. The dollar-won exchange rate dropped from 1555.80 won on July 2 to 1392.60 won on the previous trading day. During the same period, the 3-year government bond yield increased from 3.745% to 3.822%. The decline in the exchange rate reduces the burden of import prices and alleviates the Bank of Korea's monetary tightening pressure; however, this time, the yields remained at a high level. There are interpretations suggesting that the weight of the exchange rate in the Bank of Korea's monetary policy judgment has decreased, and analyses indicate that the focus of interest rate decisions is now more on growth, inflation, and financial stability rather than the exchange rate. Participants in the bond market diagnose that the decline in the exchange rate is not significantly impacting yields, and the Bank of Korea's Monetary Policy Committee is scheduled to hold a monetary policy direction meeting on August 27. It remains to be seen how much the decline in the exchange rate will be reflected in the future movements of government bond yields.

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