Calm Exchange Rate After Korea-US Currency Swap, Future Outlook

Experts: "Clearly Effective in the Short Term... Global Dollar Shortage Remains"

[Image source=Yonhap News]

[Asia Economy Reporter Kim Eunbyeol] The domestic foreign exchange market, which had been shaken by fears of the novel coronavirus infection (COVID-19), is showing a collective rebound thanks to the Korea-US currency swap agreement. The won-dollar exchange rate, which had dropped by as much as 40 won in a single day on the 19th just before the Korea-US currency swap agreement, has returned most of the surge.

According to foreign exchange market experts on the 21st, while the currency swap has helped avoid the worst-case scenario, market volatility is expected to continue depending on the global COVID-19 situation. The exchange rate, which had risen to 1300 won, is predominantly expected to fluctuate around the high 1200 won range for the time being.

Seungji Jeon, a researcher at Samsung Futures, said, "The Korea-US currency swap agreement may lead to a reversal in the exchange rate," adding, "Considering the ongoing ultra-strong trend of the dollar, we expect volatility centered around 1260 won." Kyungwon Min, a researcher at Woori Bank, predicted, "The won-dollar exchange rate will be influenced by the Korea-US currency swap agreement and the active stabilization measures by financial authorities," and "It may fluctuate around the high 1250 won range."

Dongrak Gong, a researcher at Daishin Securities, forecasted, "With the world's ninth-largest foreign exchange reserves (409.2 billion dollars) and the recent currency swap, the won-dollar exchange rate will quickly stabilize downward to the 1220 won level." Amin Kwon, a researcher at NH Investment & Securities, said, "If concerns about liquidity tightening in financial markets continue, the won-dollar exchange rate could surpass the 1300 won level," but also noted, "Based on the experience of the 2008 currency swap agreement, the current extreme preference for the dollar is expected to weaken."

However, a minority opinion suggested that if the dollar's strength continues, the calming effect on the exchange rate may not be significant.

Bloomberg reported, "Dollar shortages are so severe that any effort to change the dollar's trajectory could become ineffective." Since the foreign exchange market instability stems more from the global dollar liquidity shortage than domestic factors, the situation needs to be monitored further.

The dollar index, which measures the value of the dollar against six major world currencies, has been rising continuously, reaching its highest level in the past three years. As COVID-19 escalated into a pandemic, global investors have been dumping stocks and bonds to hold only dollar cash, causing a worldwide dollar shortage.

Yumi Kim, a researcher at Kiwoom Securities, said, "The won-dollar exchange rate is expected to show some reversal of the recent sharp rise," but regarding the sustainability of the effect, she predicted it would be "short-lived." Kim stated, "For the won to strengthen sustainably, the dollar's strength must be limited, and there must be signals that COVID-19 is calming worldwide."

She added, "Until specific measures addressing bad assets amid credit risks in the US are announced, short-term volatility in the won-dollar exchange rate is inevitable, and upward pressure may continue."

Kyoungmin Lee, a researcher at Daishin Securities, analyzed, "The currency swap is expected to partially control the panic sentiment in the foreign exchange market, which surged on the 19th, as well as the Korean financial market, which has been showing panic daily," and "The first condition for strengthening stability in the Korean financial market, including the KOSPI, has been established." However, he added, "To overcome this so-called complex crisis, liquidity supply by global central banks including the US Federal Reserve, corporate paper (CP) purchases, and above all, calming of the COVID-19 pandemic are necessary."

Sungwoo Park, a researcher at DB Financial Investment, said, "The recent domestic foreign exchange market instability is due more to the global dollar liquidity shortage than domestic factors," and "While the won-dollar exchange rate is expected to remain stable for the time being, fundamentally, global dollar value stabilization must come first."

Seunghoon Lee, a researcher at Meritz Securities, stated, "If financial instability continues, overshooting of the exchange rate may occur, but the possibility of reaching the 1500-1600 won level experienced during the 2008 financial crisis is low," and "The first quarter forecast for the won-dollar exchange rate is 1300 won, and the first half forecast is 1200 won."

Meanwhile, on the previous day in the Seoul foreign exchange market, the won-dollar exchange rate closed at 1246.5 won, down 39.2 won from the previous trading day. The exchange rate started at 1253.7 won, down 32 won, and widened the decline to move in the 1240 won range in the afternoon.

This content was produced with the assistance of AI translation services.