Why the Hesitation in the Dollar Weakness?

[Asia Economy Reporter Song Hwajeong] As the dollar's weakness, which continued since the second half of last year, has paused, the KRW-USD exchange rate is expected to rise further. However, the increase is likely to be limited due to Korea's strong export performance.

According to KB Securities on the 16th, as the dollar's weakness has paused, the KRW-USD exchange rate, which had fallen to 1082 won at the beginning of the year, has risen to a level close to 1100 won.

The background of this dollar strength is attributed to rising interest rates. Hyojin Kim, a researcher at KB Securities, explained, "The rise in U.S. interest rates, based on concerns over expanding inflation, is identified as the background of the dollar's strength. The 10-year U.S. break-even inflation rate has surpassed 2%, and the 10-year U.S. Treasury yield has risen above 1%." Since 2019, the correlation between the interest rate differential between the U.S. and Europe and the dollar index has mostly been negative, moving in opposite directions, but the recent rapid rise in U.S. interest rates is interpreted as exerting upward pressure on the dollar. Kim added, "The possibility of rising inflation and interest rates will pause the dollar's weakness trend but will not shift the dollar's overall stance to strength."

Along with the U.S. interest rate trend, attention should also be paid to the short-term futures positions in the foreign exchange market. Kim said, "Futures positions do not have a significant impact on the dollar level itself, but at inflection points of dollar strength and weakness, position changes in buying and selling appear one step earlier. In the short term, futures positions are shifting from selling to buying, leading to short-term dollar strength."

As the dollar is likely to continue its short-term strength, the KRW-USD exchange rate may rise further, but the increase is expected to be limited. Kim forecasted, "Among the 14 major export items, the number of items with increased export value compared to the previous year rose from 2 in April last year to 11 in December, indicating an expansion in Korea's export improvement. Although dollar strength is a factor for the KRW-USD exchange rate increase, since Korean exports are showing strong performance, the rise will not be significant."