Weak Dollar and Bond Yield Rise Continue... Government "Responding to Market Fluctuations" (Comprehensive)

Possibility of KRW/USD Exchange Rate Falling to 1100 Won Range if Biden Elected
Passing Fiscal Stimulus → Increase in Government Bond Issuance → Decline in Bond Prices
Government and Foreign Exchange Authorities Closely Monitoring... Will Respond if Necessary

[Image source=Reuters Yonhap News]

[Asia Economy Reporter Eunbyeol Kim] Even after the next U.S. president is decided, the trend of a 'weak dollar and strong bond yields (bond prices falling)' is expected to continue. In particular, if Joe Biden, the Democratic presidential candidate, is elected, a strong dollar weakness is anticipated, with the won-dollar exchange rate predicted to fall to the 1100 won range. This is because if the U.S. passes a large-scale fiscal stimulus package, the dollar value is expected to decline further. To inject more money, additional government bond issuance is essential, which will increase the supply of government bonds in the market and inevitably cause prices to fall. The government and foreign exchange authorities are also reviewing response measures as needed, monitoring the U.S. election situation and its impact on the Korean market.

On the 4th, domestic and international market experts unanimously stated that if Biden is elected, emerging market currencies will show noticeable strength. Piotr Matys, Senior Emerging Markets Strategist at Rabobank, forecasted, "If the U.S. Democrats achieve a 'Blue Wave' by controlling not only the White House but also both the House and Senate in the election, emerging market currencies will strengthen." If the Democrats control Congress, they can easily pass large-scale fiscal stimulus packages, which would further weaken the dollar. Especially recently, South Korea has been recovering quickly from the economic shock caused by the COVID-19 pandemic, leading to a relatively stronger won. The Hyundai Research Institute stated, "Regardless of which candidate wins, the dollar weakness will continue," adding, "Considering domestic and international conditions, the outlook for won strength is dominant."

U.S. President Donald Trump (left) and Democratic presidential candidate Joe Biden (right)
[Image source=AP Yonhap News]

Along with the weak dollar, bond yields are expected to strengthen. Passing a large-scale fiscal stimulus package inevitably leads to government bond issuance, which can cause an oversupply in the bond market and a drop in bond prices. Bond yields move inversely to prices. Even excluding the U.S. situation, domestic government bond issuance has already increased in response to the COVID-19 crisis, and further issuance is expected next year, leading to a rise in bond yields. The market expects the 10-year Korean Treasury bond yield to rise to the mid-1% range or higher next year.

The government and foreign exchange authorities are also monitoring the market, expecting the weak dollar and rising bond yield trend to continue. Kim Yong-beom, First Vice Minister of Strategy and Finance, convened departments related to macroeconomic finance within the Ministry of Strategy and Finance at the Seoul Government Complex to review the U.S. election trends, the impact on domestic and international economies and markets under various scenarios, and response plans. The Bank of Korea also held a situation review meeting at 5 p.m. on the day the U.S. election outline became clear, chaired by Deputy Governor Lee Seung-heon.

One of the key concerns for authorities is how steeply the weak dollar trend will manifest. Given South Korea's export-driven economic structure, a decline in the won-dollar exchange rate could have negative effects. Especially if the exchange rate falls sharply, export companies may face confusion, prompting authorities to take measures such as verbal intervention. Until mid-September, the won-dollar exchange rate fluctuated around 1160-1170 won, but it fell below 1150 won last month, then below 1140 won, and eventually broke through 1130 won. On the day in question, the won-dollar exchange rate started at 1128.3 won, down 5.8 won. If an imbalance in bond market supply and demand occurs, the Bank of Korea may intervene by purchasing government bonds. The Bank of Korea conducted a simple purchase of government bonds worth 1.5 trillion won on the 28th of last month.

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