US Dollar Weakness Expected to Resume After Biden's Election Victory... Political Turmoil Remains a Variable

[Image source=Reuters Yonhap News]

[Asia Economy Reporter Kim Eunbyeol] With Joe Biden, the Democratic presidential candidate, elected as the next U.S. president, expectations are growing that a large-scale U.S. economic stimulus package and the resulting dollar weakness will resume.

On the 8th, domestic and international experts from institutions such as Woori Financial Management Research Institute, Hyundai Research Institute, and KB Management Research Institute unanimously predicted that dollar weakness would emerge following Biden's victory. Although the 'Blue Wave,' where the Democratic Party would also control the Republican-held Senate, did not materialize, they believe that if a large-scale stimulus package passes under Biden's administration, the dollar's value will decline further.

In particular, South Korea has been recovering quickly from the economic shock caused by the COVID-19 pandemic, leading to a relatively stronger won. Hyundai Research Institute stated, "Regardless of which candidate wins, dollar weakness will continue," adding, "Considering domestic and international conditions, the outlook for won strength is dominant."

Another factor contributing to dollar weakness is the possibility that Biden will reverse the approach taken by U.S. President Donald Trump, who engaged in a trade war. Biden has advocated for a multilateral trade system and cooperation with allied countries. Although he has not expressed a specific stance on the U.S.-China trade war, experts believe that simply restoring the multilateral trade system could have a positive impact. Historically, the dollar has strengthened as a safe-haven asset whenever trade wars occurred.

The high likelihood of Jerome Powell being reappointed as Chair of the Federal Reserve (Fed) is also a reason that could weaken the dollar. Powell has emphasized maintaining an accommodative monetary policy until the economy recovers from the shock caused by the spread of COVID-19. His term expires in February 2022, and he is expected to be reappointed next year.

Along with dollar weakness, bond yields are expected to rise. Passing a large-scale fiscal stimulus package inevitably leads to increased issuance of government bonds, which could result in an oversupply in the 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 anticipates that the 10-year Korean Treasury bond yield will rise to the mid-1% range or higher next year.

However, dollar depreciation may be limited and volatile until Biden's administration stabilizes politically. The Senate is controlled by the Republican Party, which could lead to conflicts, and President Trump has not readily conceded defeat in the election, adding uncertainty. If Trump continues legal battles, unrest could intensify, exerting upward pressure on the dollar. Additionally, the ongoing COVID-19 situation in the U.S. remains a risk factor supporting a strong dollar.

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