US Stock Market Plunge Boosts 'Safe Haven' Dollar Strength... Fear Index Soars

[Image source=Reuters Yonhap News]

[Asia Economy Reporter Jeong Hyunjin] As the US stock market plunged sharply, the value of the dollar, a safe-haven asset, rose again. Although demand surged sharply last March due to the impact of the novel coronavirus infection (COVID-19) and has recently stabilized, concerns about a resurgence have caused it to strengthen once more.

According to Bloomberg on the 11th (local time), the dollar index closed at 96.733, up 0.81% from the previous day. Until the day before, it had recorded the lowest level in over three months since early March, but as the stock market plunged 5-7% that day, the dollar's value increased instead.

The dollar's return to strength is due to increased market fear. The so-called "fear index," the volatility index (VIX), surpassed the 40 level that day. The VIX exceeding 40 was the first time since April 23 (41.38). John Doyle, Vice President of Tempus Trading, said, "The stock market is undergoing a correction to see if the historic rally aligns with reality," adding, "Although there are concerns about reinfection, I believe the situation has not changed significantly from earlier in the week."

However, some point out that this market condition may be a temporary phenomenon arising from the recent correction of the sharply rising stock market. Kit Jukes, strategist at Soci?t? G?n?rale, said, "As the US Federal Reserve (Fed) keeps interest rates low, the dollar will show further weakness," adding, "During the dot-com crash, central banks continued easing policies to support economic recovery, and the dollar's value fell about 40% over six years. Although short-term turmoil is inevitable, the Fed will provide us with a weaker dollar."

Due to the dollar's strength, the value of emerging market currencies, which had recently been rising, fell again. The won-dollar exchange rate was trading at 1,208.2 won as of 9:26 a.m. on the 12th, up 11.43 won from the previous day.

One foreign media outlet reported that the amount of dollars withdrawn by other central banks that have dollar swap agreements with the Fed was $447 billion (about 540.1 trillion won) as of the first week of June, below the $583 billion during the global financial crisis in December 2008. It interpreted that the recent improvement in the COVID-19 situation has also affected the use of dollar swaps. The European Central Bank (ECB) and the Bank of Japan (BOJ) mainly secured dollars through the Fed, and South Korea and Mexico also utilized swaps, the foreign media reported.

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