BOK: "US Dollar Weakness Due to Active Fiscal Policy and Sharp Rise in COVID-19 Cases"

December 10th, Bank of Korea to Release 'December 2020 Monetary and Credit Policy Report'

[Asia Economy Reporter Jang Sehee] An analysis has emerged that the US dollar weakness has persisted due to the active monetary and fiscal policies implemented by the US Federal Reserve (Fed) and government, as well as the surge in COVID-19 cases.

According to the 'December 2020 Monetary and Credit Policy Report' approved by the Bank of Korea on the 10th, since last September, the US dollar fluctuated within a narrow range depending on the introduction of additional US economic stimulus measures and the unfolding uncertainties related to the presidential election.

This year, the value of the US dollar against major advanced country currencies surged sharply in March, immediately after the COVID-19 pandemic outbreak, then rapidly declined until the end of August. After September, it rose somewhat before falling again after November.

Against emerging market currencies, the US dollar value has steadily declined since late March but still remained at a higher level compared to the end of the previous year.

The Bank of Korea explained that the Fed's accommodative monetary policy influenced the US dollar's weakening trend. The growth rate of the money supply in the US reached an all-time high, and the swap basis of major currencies in the offshore US dollar short-term funding market consistently exceeded past average levels.

Also, the Fed's policy rate cut by 1.50 percentage points in March, which formed expectations of prolonged low interest rates, acted as a factor weakening the US dollar. The expansion of fiscal deficits due to large-scale economic stimulus measures also affected the US dollar weakness through worsening current account balances and concerns over fiscal soundness.

The Bank of Korea forecasted that the impact of the US dollar's weakening trend on Korean export companies would not be greater than in the past. The Bank stated, "Quality competitiveness has improved compared to the past, and the proportion of imported intermediate goods input has also increased. Considering these factors, the impact of exchange rates on exports is believed to have decreased compared to before." However, it analyzed that if the exchange rate declines, it could negatively affect the profitability of Korean export companies, thus acting as a burdensome factor on the real economy.

Meanwhile, the US has implemented fiscal support measures four times since the spread of COVID-19. The International Monetary Fund (IMF) projected that the fiscal deficit size relative to gross domestic product (GDP) this year (-18.7%) will greatly exceed not only major advanced countries but also the level during the global financial crisis (-9.8%).

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