[Financial Planning for the 100-Year Life] King Dollar Is Not at a Level to Mention a Foreign Exchange Crisis

[Image source=Yonhap News]

It happened in 1998. The dollar's strength, which began with the Asian financial crisis, peaked in August with Russia's moratorium (payment deferral) declaration. The dollar index, which indicates the dollar's status against the six major currencies, reached its highest level in decades, and as a result, the yen-dollar exchange rate rose to 147 yen. The adage that the dollar strengthens when the world is unstable proved true.

As the dollar strengthened, all kinds of forecasts emerged. Since the world had nowhere to trust but the United States due to consecutive financial crises, some said the dollar's strength was an irreversible trend, while others predicted the yen would rise to 200 yen by the end of 1998. These forecasts had a basis because at that time, the U.S. was the best-performing economy among developed countries. It had recorded nearly 3% growth for almost ten years and enjoyed both low inflation and high growth under the nickname "New Economy." The information technology (IT) revolution was also raging in the U.S.

After reaching its peak during Russia's moratorium, the dollar gradually weakened and faced a decisive change in October of that year. The yen, which was 136 yen per dollar, fell 13% to 118 yen in just six days. This meant the dollar weakened so much that even Japan's general trading companies, which preferred the dollar the most, started selling it. 1998 became a case demonstrating how rapidly international exchange rates can fluctuate.

The exchange rate is causing chaos. Despite the won-dollar exchange rate surpassing 1,400 won, the rate of increase is hardly slowing down. Because of this situation, forecasts keep rising, with some saying it will exceed 1,500, and some are worried about a financial crisis. The outlook for a strong dollar is also gaining momentum. Due to high inflation, interest rate hikes, and expected economic slowdown, it is said that the dollar strengthening is natural in a crisis situation.

If there were other safe currencies like the euro or yen that could rival the dollar, the dollar's strength might ease, but everyone is struggling with their own problems, so they cannot be trusted. While this is true, looking at it from the opposite perspective reveals another world. The factors driving the dollar's strength have already been sufficiently reflected in prices. Europe is rapidly raising interest rates, so the situation is different from the first half of the year when only the U.S. was raising rates unilaterally. Attempts to prevent the depreciation of domestic currencies are also underway, as seen in Japan's defense of the yen through foreign exchange reserves.

The biggest change factor is that one-sided dollar buying occurred in the international currency market due to expectations of a strong dollar. Since those who wanted to buy have already bought, the dollar can be shaken by even small changes. Although there are many factors supporting the dollar's strength now, they do not surpass those of 1998. The U.S. economy's strength is much weaker compared to then, and interest rates were much higher in 1998 than now. One might mention the Ukraine crisis, but back then, it was a time when Russia defaulted following the Asian financial crisis.

Although there is anxiety about the exchange rate, it is not enough to talk about a financial crisis. Rapid rises in price variables like exchange rates or stock prices often end with sharp declines. Who knows if something like 1998 will happen again this time?

Lee Jong-woo, Economic Columnist