The Value of the Korean Won Plummets Amid COVID-19 Spread

[Asia Economy Reporter Koo Eun-mo] As the spread of the novel coronavirus infection (COVID-19) shows little sign of abating, the intensified risk-averse sentiment in the financial market is leading to a sharp rise in the won-dollar exchange rate. With COVID-19 rapidly spreading from Asia to Europe, causing weakness not only in the Korean won but also in the euro, the relative strength of the US dollar is expected to be inevitable for the time being.

According to the Bank of Korea on the 26th, the won-dollar exchange rate closed at 1,210.3 won, down 9.9 won from the previous trading day (1,220.2 won). Although it showed a brief pause the day before, the won-dollar exchange rate has been rising, surpassing the 1,200 won level for the first time in about five months since October 2 last year (1,206.0 won) based on the closing price on the 21st. The Dollar Index (DYX) has also maintained the 99-point level steadily since the 12th, continuing the strong dollar trend.

As the won weakens and the dollar strengthens relatively, exchange-traded products (ETPs) linked to the dollar's rise and yields are showing strength. According to the Korea Exchange, TIGER US Dollar Futures Leverage has risen 5.4% over the past 10 trading days, KOSEF US Dollar Futures Leverage (Synthetic) 5.2%, and KODEX US Dollar Futures Leverage 5.0%, all recording returns in the 5% range. During the same period, the KOSPI fell by 5.4%.

The primary reason behind the recent upward trend in the won-dollar exchange rate is undoubtedly COVID-19. As the number of confirmed COVID-19 cases increases daily, risk-averse sentiment in the financial market has intensified, leading to a sharp drop in the domestic stock market and a rapid rise in the won-dollar exchange rate. Foreign investors have been withdrawing funds, net selling 1.9868 trillion won in the stock market from last week through the day before. Additionally, negative outlooks on the domestic economy's fundamentals and the increasing possibility of a rate cut by the Bank of Korea are pushing the won-dollar exchange rate higher.

Experts generally foresee that the won's weakness will be unavoidable for the time being. This is because the ripple effects of COVID-19 on the domestic and global economy are expanding. Recently, COVID-19 has spread beyond Asia to Europe, causing euro weakness, which creates an environment that could lead to won weakness. Kim Hyo-jin, a researcher at KB Securities, explained, "With the number of infections expanding in Italy and the euro weakening alongside the strong dollar trend, this creates an environment likely to lead to won weakness." He added, "Delayed export recovery and a decrease in tourists are also factors that fuel won weakness."

Researcher Kwon Ah-min of NH Investment & Securities also pointed out the slowdown in China's real economy indicators and, considering the impact of this slowdown on Europe, assessed that the US is likely to lead the global economy, making a trend reversal to dollar weakness difficult. Researcher Kwon elaborated, "China's first-quarter GDP growth rate is likely to fall below 5%. Although a rebound is expected in the second quarter, it will take time for Europe to benefit, and unlike China, Europe is unlikely to expect a boost from construction investment."

However, there are views that the dollar will not surge strongly further. Kim Yu-mi, a researcher at Kiwoom Securities, explained, "Considering the recent rising expectations of a rate cut by the US Federal Reserve (Fed) and the Chinese government's strengthening of economic stimulus policies, the dollar is more likely to remain firm rather than rise further." She also pointed out that Korea's foreign exchange authorities' intervention and the policy authorities' strengthened willingness to respond actively are factors that could calm the rapid rise in the won-dollar exchange rate.