'Dollar Futures ETF' Hits the Brakes

Won-Dollar Exchange Rate Falls to 1,130 Level for the First Time in 18 Months... Impact of Yuan Strength

[Image source=Yonhap News]

[Asia Economy Reporter Eunmo Koo] As the Chinese economy shows signs of recovering from the impact of the novel coronavirus disease (COVID-19), the yuan is strengthening. The US dollar is weakening at an accelerated pace, causing the won-dollar exchange rate to fall to its lowest level in one and a half years, while exchange-traded funds (ETFs) linked to dollar futures have been declining continuously.

According to the Seoul foreign exchange market and the Korea Exchange on the 21st, the won-dollar exchange rate closed at 1,139.40 won per dollar, down 2.60 won from the previous day. This is the first time in about 18 months since April 19 last year (1,136.90 won) that the exchange rate has fallen into the 1,130 won range based on the closing price. The won-dollar exchange rate drew a steep downward curve after rising to 1,189.60 won on the 4th of last month, when COVID-19 resurged domestically.

As the won-dollar exchange rate dropped to its lowest level this year, ETFs linked to the movement of dollar futures have also been falling day by day. Since the previous high of the won-dollar exchange rate on the 4th of last month, KOSEF US Dollar Futures has fallen 4.2% as of the previous day. During the same period, KBSTAR KRX300 US Dollar Futures Mixed and KODEX US Dollar Futures also fell 4.2% and 4.1%, respectively. The decline in leveraged ETFs was even greater, with TIGER US Dollar Futures Leverage down 8.3%, KOSEF US Dollar Futures Leverage (Synthetic) down 8.3%, and KODEX US Dollar Futures Leverage down 8.2%.

The continuous decline in the won-dollar exchange rate is due to the US dollar weakening since May amid large-scale supply expansions during the US COVID-19 crisis resolution process, while the yuan is strengthening. Recently, the yuan has continued to strengthen as the recovery of the Chinese economy becomes visible, and the Korean won, which is highly dependent on the Chinese economy, has also strengthened accordingly. China's third-quarter gross domestic product (GDP) growth rate, announced on the 19th, was 4.9%, improving from the second quarter, continuing the recovery trend.

The future direction of the US dollar is expected to be determined by the US presidential election and the value of the Chinese yuan. In the short term, the dollar is likely to weaken further. This is because the global economy is recovering, and regardless of the presidential election outcome, US economic stimulus issues are expected to come to the forefront in the first half of next year.

However, the direction of the dollar may change depending on the results of the US presidential election in November. Changseop Oh, a researcher at Hyundai Motor Securities, explained, "Traditionally, the US Republican Party prefers economic stimulus policies and chooses a dollar-weakening policy, while the Democratic Party tends to accept a relatively stronger dollar along with free trade," adding, "It is important to note that the medium- to long-term direction of the dollar may change depending on the election results."

Since the People's Bank of China is taking stabilization measures to ease the pressure of yuan appreciation, some opinions suggest that the exchange rate will fluctuate around the current level rather than continue to decline. On the 10th, the People's Bank of China lowered the foreign exchange futures margin ratio from the previous 20% to 0%. Lower margins increase the amount of dollars that can be purchased, which can help ease the yuan's appreciation.

Hye-yoon Lim, a researcher at KTB Investment & Securities, explained, "After the National Day holiday (October 1-8), the yuan-dollar exchange rate fell 1.4% below 6.7 yuan compared to before the holiday, leading to the abolition of the mandatory margin for forward exchange transactions," adding, "This is a measure to induce an increase in yuan supply and appears to be aimed at controlling the sharp appreciation of the yuan."

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