"Weakening of the Dollar Expected No Earlier Than Q4"

[Asia Economy Reporter Song Hwajeong] Although the dollar, which had been strong throughout this year, has recently shown weakness, it is expected that the dollar's weakness will not fully materialize this year.

According to KTB Investment & Securities on the 13th, the dollar index had exceeded 100 due to the impact of the novel coronavirus infection (COVID-19), but it fell by 3% over two weeks reflecting discussions on the European Union (EU) recovery fund and expectations for the resumption of economic activities in major countries.

Im Hyeyoon, a researcher at KTB Investment & Securities, said, "The dollar is expected to turn weak in the mid to long term," but added, "However, it will be difficult for this to fully materialize this year."

The expectation that the dollar will turn weak in the mid to long term is because the policy direction of the U.S. Federal Reserve (Fed) to ease fiscal deficits and government debt burdens (maintaining low interest rates and tolerating inflation) supports a weak dollar. Considering the Fed's policy capacity and willingness, the increase in dollar liquidity is expected to be relatively rapid, and the fact that the real effective exchange rate remains at an overvalued level also indicates increasing pressure for a weak dollar.

However, it is forecasted that the dollar will not immediately turn weak in the second half of the year. First, the Trump administration finds it difficult to immediately pursue a weak dollar policy. From the U.S. perspective, COVID-19 is a risk that could accelerate narrowing the gap with China. In this situation, it is unlikely that the U.S. would hastily adopt a weak dollar policy that could weaken dollar hegemony and favor China's growth. Researcher Im explained, "President Trump’s stance supporting a strong dollar and the Fed’s cautious approach to introducing yield curve control, which could reduce the attractiveness of holding U.S. Treasury bonds, can be understood in this context."

Next, the recent euro strength amid weak signs of Eurozone economic recovery is likely to be short-lived. The recent euro appreciation mainly reflects expectations for recovery, such as discussions on the EU recovery fund financing and expanded German fiscal spending. Im said, "This can be interpreted positively in that the capacity to withstand shocks has relatively increased compared to the past, but if accompanied by no real economic recovery, the euro's strength is unlikely to persist."

Lastly, it seems unlikely that China will actively allow the yuan to strengthen this year. From China's perspective, the current situation where dollar supply is increasing and dollar demand is stagnating may be an opportune time to strengthen mid to long-term growth momentum. Im said, "Allowing yuan appreciation could mean encouraging domestic demand expansion, financial market opening, and yuan internationalization," but added, "However, the policy direction revealed at this year's National People's Congress (NPC) was somewhat different, indicating a focus on employment recovery through expanded traditional infrastructure investment." It is analyzed that China, facing a larger-than-expected COVID-19 impact, seems to want to concentrate policy capacity on short-term growth for now. Im explained, "The yuan's appreciation over the past two weeks was minimal compared to other emerging markets, and the broad money supply (M2) and social financing growth rates have been rising since March," adding, "The People's Bank of China does not appear to have a strong need or willingness to control yuan depreciation."

Therefore, the strong dollar trend is expected to continue for the time being. Researcher Im said, "The point at which the weak dollar fully materializes could be as early as the fourth quarter of this year, and this is likely to continue until confidence in the dollar weakens or the market begins to worry about inflation and asset price bubbles."

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