Dollar Expected to Weaken Before and After Stimulus Package Approval

[Asia Economy Reporter Song Hwajeong] Contrary to expectations, the dollar has shown strength since the beginning of the year, but it is forecasted that the dollar's weakness will resume around mid-February.

According to Daishin Securities on the 11th, the dollar index, which once fell below 90, has risen again above 91, approaching 92, and the KRW/USD exchange rate also rebounded after falling to the lower 1080 won range, rising to the 1120 won level. Gong Dongrak, a researcher at Daishin Securities, said, "The core consensus regarding the outlook of various price variables formed in the financial market as of the end of last year was a bullish risk asset and a bearish safe asset, and this consensus has shown a generally high accuracy at this point, a little over one month later. However, the one forecast that did not align with the pre-formed consensus was the expected movement of the dollar."

At the end of last year, the financial market forecasted that the dollar would weaken this year, based on the U.S. government's aggressive economic stimulus measures. The expectation was that as the U.S. injects money and increases dollar supply in the foreign exchange market, the dollar would weaken. Researcher Gong said, "Despite all the major expectations and measures such as the U.S.'s aggressive economic stimulus, only the dollar is forming a strong trend rather than a weak one."

The foreign exchange market's movement differing from expectations is analyzed to be due to the Eurozone and Japanese economies. Gong explained, "Not only are the Eurozone and Japanese economies falling significantly short of the initially expected levels, but the inevitable downward revision of additional growth rates is sensitively affecting the exchange rates."

The shock of the COVID-19 resurgence was a common risk faced by countries worldwide, but while the U.S. is relatively resilient in overcoming the shock, the Eurozone is facing renewed concerns about economic downturn due to strengthened additional lockdown measures. Additionally, the consensus for Japan's first-quarter growth rate is being revised downward, and the rise in U.S. Treasury yields in the bond market is surpassing those of Japan and Germany simultaneously.

In the mid- to long-term trend, the dollar is expected to show a weakening trend. Researcher Gong said, "In addition to the U.S.'s aggressive money supply, since the global economy is in the early recovery phase accompanied by the possibility of trade improvement, it is judged that dollar weakness is likely in line with the normalization of U.S. consumption. However, since concerns about economic slowdown in major counterparties such as the Eurozone and Japan have unexpectedly emerged, it may take some time before the dollar's weakness resumes." He added, "The dollar weakness is expected to resume around mid-February, when the Biden administration's economic stimulus package is expected to pass."