The soil-water characteristic curve is an important constitutive feature of unsaturated soils, defining the relationship between the soil suction and moisture content. Mineral component and pore space topology are the most important physical factors affecting the soil-water characteristic, and that dry density synthetically reflects the mineral component and pore space topology. Compaction is a classical application involving unsaturated soil, and dry density represents the pore structure at special moisture content. Soil water characteristic curve for compacted loess is studied by test, and the effect of dry density on soil water characteristic curve is discussed. Based the soil-water characteristic curve and compaction curve, mechanism of compaction is explained. Research results show that the soil-water characteristic curves for all dry density soil intersect at the point, which is optimize moisture content, and suction is the most important factor affecting the compaction.