China's 5th Plenary Session Opens... Won-Dollar Exchange Rate Hits 1,120 Won Intraday for First Time in 1 Year 7 Months

U.S. President Donald Trump (left) and Chinese President Xi Jinping (right) [Image source=AP Yonhap News]

[Asia Economy Reporter Kim Eunbyeol] On the 26th, the Korean won to US dollar exchange rate fell to the 1,120 won level intraday for the first time in 1 year and 7 months. This is due to a combination of factors, including the expectation that the dollar will remain weak until the first half of next year even after the US presidential election, and the yuan showing strength starting from the 19th Central Committee of the Communist Party of China’s 5th Plenary Session (19th 5th Plenum) held from this day.

At 9:37 a.m. in the Seoul foreign exchange market on the same day, the won-dollar exchange rate was trading at 1,129.62 won, down 0.30% from the previous trading day. The exchange rate opened at 1,130.0 won per dollar and then widened its decline. The last time the won-dollar exchange rate fell to the 1,120 won level intraday was on March 22 of last year, 1 year and 7 months ago.

The market expects the dollar weakness to continue for some time even after the US presidential election. This is because the US Federal Reserve (Fed) is increasing liquidity to stimulate the economy weakened by the impact of the novel coronavirus (COVID-19), and there is a high possibility that economic stimulus measures will be implemented after the US election. Some speculate that if Democratic candidate Joe Biden is elected, the won-dollar exchange rate could fall to the 1,100 won level.

The preliminary Purchasing Managers' Index (PMI) for Germany’s manufacturing sector in October, announced on the 23rd (local time), came in at 58.0, significantly exceeding the expected 54.8, which also contributed to the euro’s strength and the dollar’s weakness. The yuan’s strength, driven by the 19th 5th Plenum in China held over four days starting from this day, also supports the won’s appreciation.

At the 5th Plenum, China is expected to draft an economic plan for the next five years centered on the "dual circulation policy," which promotes two-way circulation between domestic demand and exports. Through this dual circulation policy, China plans to activate domestic consumption and investment. While deepening external openness, China is aiming to reduce its trade dependence on the US. China’s external openness mainly focuses on opening the financial market and inducing capital inflows within the region. The internationalization of the yuan is also accelerating through the introduction of digital currency (DCEP).

This year, the Chinese government has consecutively introduced capital market opening measures such as abolishing foreign ownership limits on securities and fund companies (April), reducing the negative list for foreign direct investment (FDI) industries (June), and integrating and easing regulations on Qualified Foreign Institutional Investors (QFII) and Renminbi Qualified Foreign Institutional Investors (RQFII) (September). China Global Television Network (CGTN) reported that "since smooth capital supply and support within the region play an important role in the process of revitalizing domestic demand and supply-side structural reforms, this trend will become even more active."

The introduction of DCEP is expected to further accelerate the internationalization of the yuan. If the digital currency issuance succeeds, it will secure a faster and less costly international transaction platform, naturally expanding the yuan transaction network. Morgan Stanley forecasted that "the yuan’s share of international reserve assets will rise from the current 2% level to 5-10% within the next 10 years, making it the world’s third major international currency."

Meanwhile, although the exchange rate is weakening, it is judged that the negative impact on exports is not at a level of concern. On the 14th, at a monetary policy direction meeting, Lee Ju-yeol, Governor of the Bank of Korea, explained, "The impact of the exchange rate on our country’s exports is not as significant as in the past," adding, "The domestic export structure has also been upgraded, and exports are more influenced by global demand and international trade conditions, especially recently by the COVID-19 situation, rather than the exchange rate."

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