"Won-Dollar Exchange Rate Expected to Decline by End of Q1... Anticipation of Advanced Economies' Economic Recovery"

Won-Dollar Exchange Rate Soars... Threatening the 1120 Won Level
"Stimulus Resumption Expected to Strengthen Advanced Economies' Recovery"

[Asia Economy Reporter Minji Lee] Amid the rise in the won-dollar exchange rate due to the dollar's strength and concerns over sluggish economic recovery leading to risk asset avoidance, there is an opinion that the upward trend is unlikely to continue persistently. A decline in the won-dollar exchange rate is expected by the end of the first quarter when the economic recovery in advanced countries strengthens.

According to the financial investment industry and Shinhan Investment Corp. on the 31st, the won-dollar exchange rate is hovering around 1,120 won. As the US Treasury yields rebounded early this year and the dollar strengthened, the exchange rate rose in tandem with the dollar. Although the 10-year US Treasury yield, which had been rising, returned to the 1% level, the won-dollar exchange rate is still sharply increasing.

The weakness of the won appears to reflect concerns over delays in economic normalization and caution regarding consumption slowdown in advanced countries. Compared to major advanced countries, South Korea's vaccine procurement is insufficient, and news that the AstraZeneca vaccine, which was primarily secured, is ineffective for the elderly also had an impact.

Additionally, the effect of stimulus measures has worn off, and US retail sales have been declining for three consecutive months since October last year, which is also a burden. Retail sales in advanced countries and exports from emerging countries show a synchronized trend with a lag of about two months. Chanhee Kim, a researcher at Shinhan Investment Corp., said, “Concerns over consumption slowdown in advanced countries, which have persisted since the fourth quarter of last year, are being reflected belatedly,” adding, “Export shocks will sequentially affect emerging countries.”

In the short term, the won-dollar exchange rate is expected to move within a box range with an upward bias. Considering the time lag between US consumption and South Korean exports after the COVID-19 outbreak, there is a high possibility that South Korea's export recovery will slow in the first quarter. Researcher Kim explained, “The first quarter is traditionally a seasonal off-season following the advanced countries' shopping season, and reflecting concerns over delayed domestic demand recovery due to vaccine uncertainties, a short-term box range with an upward bias is expected.”

However, the possibility of a persistent upward trend is low. The US passed an additional $900 billion stimulus package including income support at the end of last year and resumed additional unemployment benefits and the Paycheck Protection Program (PPP), which had been halted due to lack of funds. President Joe Biden has announced an additional stimulus package worth $1.9 trillion, so it is unlikely that the dollar's strength will be maintained. Europe also extended employment support measures, such as short-time work schemes to preserve household purchasing power, until the end of this year.

Researcher Chanhee Kim said, “As stimulus measures resume and household purchasing power expands, the consumption slump is expected to be temporary,” and explained, “As the economic recovery in advanced countries strengthens toward the end of the first quarter, a decline in the won-dollar exchange rate is expected.”

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