The Impact of Exchange Rates on Asset Markets Still Minimal... Emerging as a Mid- to Long-Term Factor

Difficult to Predict Asset Market Adjustments or Bull Runs Due to Exchange Rates
Exchange Rates May Play a Key Role in Asset Markets in Q4

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[Asia Economy Reporter Gong Byung-sun] Although the U.S. Federal Reserve (Fed) mentions tightening, there is a view that, in the short term, exchange rates will not have a significant influence on overseas stock and commodity markets. However, it is judged that the influence of exchange rates will increase in the medium to long term.

On the 26th, KTB Investment & Securities analyzed that volatility in the exchange rate market could increase depending on policy changes by the U.S. Federal Reserve (Fed). It is true that the dollar generally strengthens in the early stages when the Fed shifts its monetary policy to tightening. Examples include the temporary dollar strength in 2005 during the long-term dollar weakness period before the 2008 financial crisis, and the dollar strength after the 2014 asset purchase tapering. Han-jin Kim, a researcher at KTB Investment & Securities, said, “I remember that the dollar turned strong just by the announcement of tapering during the 2014 economic expansion phase,” adding, “We need to pay attention to the Fed’s policy changes in July.”

However, it is expected that the Fed’s monetary policy will not immediately shift enough to cause a strong dollar. The Fed’s full-scale interest rate hikes are likely to be delayed, but as the economy recovers from COVID-19, inflationary pressures are rising, and the short- and long-term interest rate spread is likely to widen. If the interest rate spread is considered representative of financial imbalances, the current accommodative monetary policy, which contrasts with economic expansion, could mean that excess liquidity supply will continue. Researcher Kim said, “Considering the relationship between interest rate spreads and the dollar, even if tapering begins, the pressure for dollar strength does not seem higher than in 2014,” and predicted, “If the Fed’s stance does not change drastically, the extent of dollar strength in the second half of the year will be limited.”

The global stock market is also expected not to be shaken by exchange rates in the short term. Researcher Kim said, “The possibility of a major correction in the global stock market in the second half due to dollar strength is low,” and added, “At the same time, it is difficult for a scenario of extreme dollar weakness and extreme euro strength to emerge, so it will be hard for the global stock market to benefit from the exchange rate market during the summer.”

However, in the medium to long term, the pressure of dollar strength is expected to have some influence on the exchange rate market. Although the pressure for dollar strength due to monetary tightening is low for now, it could act as noise-level in the third quarter and as a major variable affecting asset markets in the fourth quarter. Researcher Kim predicted, “The Eurozone inflation data for June, to be announced on the 30th, and the U.S. June employment data scheduled for July 2 will provide temporary volatility to the exchange rate market,” adding, “These two indicators signal the Eurozone’s escape from deflation and the strength of the U.S. economic recovery, so the dollar and euro will act in opposite directions.”

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