Won-Dollar Exchange Rate Expected to Show Reduced Volatility This Year

[Asia Economy Reporter Song Hwajeong] Last year, the fluctuation range of the KRW-USD exchange rate expanded, significantly impacting investment returns, but this year, the fluctuation range is expected to narrow.

According to KB Securities on the 2nd, last year saw a large difference of 222 KRW between the annual high and low points of the KRW-USD rate, making the exchange rate's impact on investment returns inevitably significant. Kim Hyojin, a researcher at KB Securities, said, "When investing overseas, besides the direction of the exchange rate, an important factor is the fluctuation range, which is the difference between the annual high and low points," adding, "If the fluctuation range is large, the range of exchange losses or gains that must be endured also increases."

This year, based on the distribution of COVID-19 vaccines and economic recovery, the annual fluctuation of the KRW-USD is expected to narrow to around 130 KRW, which is the average level. Researcher Kim explained, "Looking at the previous trends of the KRW-USD, the fluctuation range was significantly higher during periods of dollar strength compared to periods of dollar weakness," and added, "This year, with the expansion of current and fiscal deficits and a accommodative monetary policy stance, the dollar weakness is expected to continue." Kim also noted, "Since the dollar index has already fallen by 7% since July last year, the pace of dollar weakness this year will be moderate," adding, "This will act as a factor reducing the fluctuation range of the KRW-USD."

The KRW-USD level, which has fallen below 1100 KRW, also increases the likelihood of a reduced fluctuation range. Comparing the annual average fluctuation ranges of the KRW-USD, there is a tendency for the fluctuation range to narrow as the KRW-USD level decreases. In 2005, the KRW-USD broke below 1000 KRW, and in 2007, it continued a downward trend approaching 900 KRW. During this period, the annual fluctuation range of the KRW-USD averaged 69 KRW from 2005 to 2007, significantly lower than the averages of 147 KRW from 2000 to 2004 and 126 KRW from 2010 to 2019. Researcher Kim interpreted, "Moderate dollar weakness, rising commodity prices, and a reduction in current account surpluses due to won appreciation led to the narrowing of the KRW-USD fluctuation range," and said, "This year, the KRW-USD is expected to average 1088 KRW, nearly 90 KRW lower than last year's average of 1180 KRW." He explained that this year's KRW-USD exchange rate will remain higher than in 2005-2007 but lower than in 2020, providing an environment for a reduced fluctuation range.

In the mid to long term, the expansion of domestic funds' overseas investment is analyzed to be a factor reducing the KRW-USD fluctuation range. Overseas investment by domestic funds increased significantly from 44% of GDP in 2008 to 131% at the end of 2019. Researcher Kim said, "The KRW-USD fluctuation in 2020 was 222 KRW, more than double the 108 KRW in 2019 due to the impact of COVID-19, but it was significantly lower than the 505 KRW in 2008-2009," adding, "The International Monetary Fund (IMF) has projected that Korea's net external assets, which are around 30% of GDP, will increase to about 50%, and the expansion of overseas assets will lead to a reduction in the KRW-USD fluctuation range."

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