Despite Exchange Rate Drop... Effect of 'US Dollar Weakness' Over Korean Economy Recovery

Won-Dollar Exchange Rate Returns to 1100 Won Range After Three Months
Result of Dollar Weakness Due to Slow US Economic Recovery

Not a Currency Decline Due to Recovery of Korean Economic Fundamentals
Potential Risks from COVID-19 Resurgence, US-China Trade War, and Emerging Market Financial Instability

[Image source=Yonhap News]

[Asia Economy Reporter Kim Eunbyeol] As the won-dollar exchange rate fell to the 1,100 won level for the first time in three months, attention is focused on how long the 'dollar weakness' trend will continue. In Korea's case, since the won's value sharply dropped in March, pushing the won-dollar exchange rate close to 1,300 won, the current situation is analyzed as positive for now. Foreign capital is also expected to flow back into the domestic stock market. However, it is difficult to interpret this unconditionally positively. There is still the possibility of a second wave of COVID-19, and external factors such as the US-China trade war could cause the exchange rate to rise again at any time. The reason we cannot be fully reassured is that the won's appreciation is not due to an improvement in Korea's economic fundamentals but rather because the US economic recovery is slower, relatively strengthening the won.

On the 10th, in the Seoul foreign exchange market, the won-dollar exchange rate opened at 1,199.0 won, up 1.3 won from the previous day, and as of 10:30 a.m., it was trading in the low 1,198 won range. Since March, when COVID-19 spread worldwide, the won-dollar exchange rate had remained in the 1,200 won range but closed at 1,197.70 won yesterday, falling below 1,200 won for the first time in about three months. On that day, the won-dollar exchange rate also dropped to 1,197.75 won around 10:15 a.m.

The exchange rate is declining because the dollar's value is relatively weak. The dollar index, which shows the dollar's value against six major currencies, fell to 96.39. The dollar index had risen to 102.82 in March when a global dollar shortage occurred.

Experts expect the dollar weakness to continue for the time being unless there is a special event. As COVID-19 revealed the US's savings shortage and fiscal deficit, there are criticisms that the dollar was excessively overvalued. The slower recovery speed of the US compared to Europe and other countries is also pulling down the dollar's value.

Lee Kyungmin, a researcher at Daishin Securities, said, "Among the currencies that make up the dollar index, the euro accounts for the highest proportion (about 60%). Recently, Europe is showing signs of calming down COVID-19, but the US is not. The US's economic recovery is slower than other countries, and nationwide protests following George Floyd's death overlap, so the dollar weakness is likely to continue."

However, experts analyze that the exchange rate could rebound in the short term depending on issues. A resurgence of COVID-19 or US-China conflicts could cause the exchange rate to surge. Since exports to China account for a large portion of Korea's total exports, if tensions between the US and China rise, the won's value tends to fall as well. Another risk factor is that emerging market financial markets, such as Argentina, which saw a rapid increase in debt due to COVID-19, could be shaken.

The foreign exchange authorities are relieved by the stabilized exchange rate for now but are monitoring it with the possibility that the international financial market could tighten again at any time. A Bank of Korea official said, "It seems the international financial market improved earlier than expected, but it looks like a temporary favorable wind is blowing. I don't think it is easy to judge that the dollar itself is in a fundamental downtrend." They also believe that the exchange rate's decline is not at a level that would immediately burden exports. The official added, "The Korean foreign exchange market has recently shown a thickened appearance, not swinging between extremes but responding to upward and downward pressures."