Won-Dollar Exchange Rate Threatens 1100 Won... Impact of Foreigners' Concentration on Risk Assets (Comprehensive)

US Dollar Expected to Remain Weak for a While
Relative Strength of Chinese Yuan, Expectation of Synchronization with Won
Optimism for Korean Economic and Export Recovery... Impact of RCEP Agreement

The dealing room of Hana Bank headquarters in Jung-gu, Seoul, on the morning of the 16th [Image source=Yonhap News]

[Asia Economy Reporter Kim Eunbyeol] As the value of the US dollar continues to weaken, the rapid recovery of our economy combined with the news of the conclusion of the Regional Comprehensive Economic Partnership (RCEP) has clearly driven the trend of a stronger Korean won. This is because foreign investors are increasing their domestic stock investments amid expectations that the economies of Asian countries, including South Korea, will recover relatively quickly.

On the 11th, the won-dollar exchange rate, which had fallen to 1110.0 won, is now expected by some to drop below 1000 won.

On the 16th, the won-dollar exchange rate opened at 1107.7 won, down 7.9 won from the previous trading day, at the Seoul foreign exchange market. During the day, the won-dollar exchange rate reached its lowest level since December 4, 2018 (intraday low of 1104.9 won). As of 9:59 a.m., the won-dollar exchange rate was falling further to 1106.13 won.

This year, the won-dollar exchange rate surged to nearly 1300 won in the early stages of the COVID-19 outbreak, but then entered a downward trend as the US Federal Reserve (Fed) released nearly unlimited amounts of dollars. It is impressive how sharply the won-dollar exchange rate dropped, making the previous rise to nearly 1300 won seem insignificant. The won-dollar exchange rate, which surged in mid-March, fell below 1200 won by late July and below 1150 won by early October. Afterward, the exchange rate dropped more sharply, falling to the 1120 won range within about a month. Although uncertainty slightly eased after the US presidential election earlier this month, causing a minor rise, the rate fell again to 1110.0 won on the 11th.

There are three main reasons for the won’s strength. The first is the weakness of the US dollar. The US dollar weakened as the US released dollars to respond to the COVID-19 shock, and this trend was further reinforced by the election of Democratic candidate Joe Biden as US president. Expectations of large-scale economic stimulus measures have led to a decline in the dollar’s value.

Another reason is the strengthening of the Chinese yuan amid expectations of China’s economic recovery and easing US-China trade tensions. Recently, the won has shown a tendency to move in tandem with the yuan. Experts evaluate that as South Korea’s economic dependence on China grows, foreign investors in the foreign exchange market view Korea and China as a kind of economic community.

From a supply and demand perspective, South Korea’s continued trade surplus and foreign investors’ preference for risk assets, leading to net purchases of stocks, are also factors driving down the won-dollar exchange rate. According to the Bank of Korea, South Korea’s current account surplus was $10.21 billion in September. Since successfully turning to a surplus of $2.29 billion in May after the COVID-19 crisis, the surplus has continued for five consecutive months. This is also the largest surplus in two years since recording $11.24 billion in September 2018. The increase in dollar supply due to the trade surplus inevitably leads to a decline in the exchange rate.

The optimism from the conclusion of RCEP is also related to the last factor. With the conclusion of RCEP, economic cooperation between ASEAN (Association of Southeast Asian Nations) and South Korea is expected to deepen, leading to increased exports and a stronger won. In particular, the government expects that in the context of weakened export momentum due to the US-China trade dispute and COVID-19, the agreement will help reduce the decline in South Korea’s exports, suppress import growth, improve gross domestic product (GDP), and even bring about effects from the reorganization of the global value chain (GVC). If the dollar’s share is reduced in new economic communities like RCEP, it is highly likely that the dollar’s level will be further downgraded, which also supports the dollar’s weakness.

The Bank of Korea stated, "With the continued weakness of the US dollar and strength of the yuan, and relatively favorable economic indicators (growth rate, current account surplus), expectations for economic recovery are driving the continued decline of the won-dollar exchange rate."

Meanwhile, the market argues that some government intervention is necessary as the won-dollar exchange rate’s decline has been excessively steep. Several verbal interventions have been attempted to calm the exchange rate decline, but they have not been very effective. Oh Changseop, an analyst at Hyundai Motor Securities, said, "The macroeconomic fundamentals themselves favor a decline in the exchange rate, but speculative forces in the foreign exchange market are entering with short bets on won strength, so herd behavior cannot be ignored. Only the government can stabilize and curb these psychological factors."

Oh added, "This year alone, the exchange rate has dropped significantly from 1300 won to 1050 won, with the won-dollar exchange rate decline cycle moving within just a few months. This is quite burdensome for exporters and could ultimately pose problems for economic recovery, so the government needs to pay attention to this."

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