Exchange Rate Drops to 1192 Won Intra-day... Caution Against Premature 'Positive Signal' (Update)

Won-Dollar Exchange Rate Falls to 1100 Level 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 Include COVID-19 Resurgence, US-China Trade War, and Emerging Market Financial Instability

[Asia Economy Reporter Kim Eunbyeol] As the won-dollar exchange rate fell to the 1100 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 and the won-dollar exchange rate nearly reached 1300 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 raising the won's value.

On the 10th, in the Seoul foreign exchange market, the won-dollar exchange rate opened at 1199.0 won, up 1.3 won from the previous day, then showed a downward trend and fell to 1192.60 won as of 11:24 a.m. Since March, when COVID-19 spread worldwide, the won-dollar exchange rate had remained in the 1200 won range, but it closed at 1197.70 won the previous day, falling below 1200 won for the first time in about three months.

The reason the won-dollar exchange rate is declining is that the dollar is relatively weak. The dollar index, which shows the value of the dollar 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."

As the dollar weakness continues, the market is hopeful that foreign investors who left due to the weak exchange rate news will return. For foreign investors, investing during a phase when the won-dollar exchange rate is falling can also yield foreign exchange gains.

However, experts analyze that the exchange rate could rebound in the short term depending on issues. A resurgence of COVID-19 or US-China tensions could cause the exchange rate to surge. Since exports to China account for a large portion of Korea's total exports, if US-China tensions rise, the won's value tends to fall as well. There is also risk from emerging market financial markets, such as Argentina, where debt has rapidly increased due to COVID-19.

The foreign exchange authorities are relieved by the stabilized exchange rate for now but are monitoring with the possibility in mind that the international financial market could tighten again at any time. A Bank of Korea official said, "It seems the international financial market has improved earlier than expected, but it looks like a temporary favorable wind. 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 downward trend 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."

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