The Dollar Keeps Falling No Matter What... Exchange Rates Defying the Usual Rules

'US Dollar Strength During US Democratic Party Rule' Formula Unlikely to Work in Biden Era
Even If US Stimulus Raises Treasury Yields, Vaccine Development News Ultimately Supports Weak Dollar
Concerns Over Manufacturing Export Competitiveness, Foreign Exchange Authorities Also Struggle to Intervene

[Asia Economy Reporter Kim Eunbyeol] The global market is betting on a weak US dollar. Despite news of the development of a COVID-19 vaccine and reports of severe COVID-19 spread, the market is moving toward a dollar weakness trend for various reasons. Even factors that historically would have triggered a strong dollar phenomenon are not effective. Amid the dollar's weakness, the Chinese yuan and Korean won are showing relative strength, causing the won-dollar exchange rate to fall continuously. Given that exports account for 40% of South Korea's gross domestic product (GDP), a sharp drop in the won-dollar exchange rate is unwelcome news. It could lead to side effects such as weakened export competitiveness in manufacturing and deteriorated corporate profitability. However, due to the unpredictable direction of the dollar and concerns about being designated as a currency manipulator, the foreign exchange authorities find it difficult to intervene hastily.

Will the 'US Democrats = Strong Dollar' Formula Break?

According to MarketWatch on the 17th (local time), the dollar index, which measures the value of the US dollar against six major currencies, fell 0.22% to 92.44. The dollar index, which surged to 102.82 on March 15 during the early spread of COVID-19, declined after the US Federal Reserve (Fed) injected massive funds.

The dollar weakness trend accelerated after news that Democratic candidate Joe Biden won the US presidential election held earlier this month. The dollar index, which was 94.13 on the 2nd, dropped by 1.8% in just over two weeks. The interpretation was that if Biden took office, large-scale economic stimulus packages would be passed, more dollars would be injected into the market, and the dollar's value would decline. Therefore, the formula 'Democrats = strong dollar' is unlikely to hold for the time being in the Biden era. Since the 1980s, examining the dollar index alongside incumbent presidents and ruling parties shows that Republicans typically preferred a weak dollar, while Democrats favored a strong dollar. During the administrations of former Presidents Bill Clinton and Barack Obama, the dollar index rose by about 20%.

Even if US Treasury Yields Rise Due to Stimulus... Dollar Remains Weak

Typically, when US Treasury yields rise, the US dollar strengthens. This is because global investors seeking higher bond yields increase their demand for dollars. Thus, the flow of 'US stimulus package passage → economic recovery expectations → inflation rise → Treasury yields rise (bond prices fall) → strong dollar' often occurred. This phenomenon was observed when President Donald Trump’s stimulus packages were passed early in his administration.

However, this year, whenever there is news of stimulus packages, the dollar tends to weaken. The news of Biden's election is also linked to the possibility of stimulus package passage, which is fueling dollar weakness. Oh Changseop, an analyst at Hyundai Motor Securities, forecasted, "Next year, after the US president takes office, the stimulus package issue could further strengthen the dollar's weakness." A foreign exchange market official pointed out, "If the stimulus package passes, Treasury issuance will increase and yields will rise, but the dollar is falling even more," calling it difficult to understand.

Vaccine Development News Also Encourages Risk Asset Betting

News of COVID-19 vaccine development is also being used as a factor that encourages dollar weakness. On the 9th, when US pharmaceutical company Pfizer announced that its COVID-19 vaccine candidate was over 90% effective, the dollar index showed strength for about two days. This was based on the traditional view that early vaccine distribution would accelerate US economic improvement and bring forward the timing of interest rate hikes. However, the dollar soon resumed its downward trend. The market reasoned this time that "when the economy improves, there is a shift toward risk assets." Citigroup warned that the US dollar could plunge 20% next year due to the vaccine news.

Regardless of the reasons, the continued dollar weakness puts South Korea’s foreign exchange authorities in a difficult position. It is hard to intervene hastily in the won-dollar exchange rate decline, which follows the global trend. A foreign exchange official said, "In overseas markets, Korea’s growth rate improvement is ranked first, so it is natural for the won to appreciate, but I had nothing to say when asked about it."

However, the foreign exchange authorities cannot just stand by. The market believes that large corporations can withstand a won-dollar exchange rate around the 1,000 won level, but small and medium-sized enterprises would be shocked if the rate falls below 1,100 won. The Bank of Korea and the Ministry of Strategy and Finance, among other foreign exchange authorities, hold the position of "accepting the dollar weakness trend but responding when there is sudden volatility."

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