New Year Stock Market Keywords: Dollar, Inflation, China

Dollar Index Steady
Has Inflation Peaked?
China's Monetary Easing Phase

[Asia Economy Reporter Junho Hwang] This year, with the tapering end and interest rate hikes beginning in the United States, concerns about liquidity in the stock market have increased since the beginning of the year. However, despite the tightening stance, the dollar index remains steady, and there is analysis that inflation has peaked. Furthermore, if China's easing policies to stimulate the economy are added, it is expected to strengthen the recovery of investment sentiment toward risky assets such as stocks.

◆ Dollar Index Steady = As of December 31 last year (local time), the dollar index, which shows the value of the dollar against six major currencies, recorded 95.67. After confirming the hawkish stance, it recorded 96.88 on November 24 last year, ahead of the Federal Open Market Committee meeting in December, and has been on a gentle downward slope since then. Compared to the 2-year US Treasury yield rising from 0.613% to 0.730% during the same period, surpassing the highest level since the pandemic due to the accelerated pace of interest rate hikes, this is an unusual situation.

This is analyzed as a result of the US tightening stance being priced in early. Seojung Hoon, a researcher at Samsung Securities, said, "Assuming the dollar rose first reflecting the possibility of tightening, the momentum for further increase is likely to slow down." He added, "Considering the significantly low valuation burden of the domestic stock market and exchange rate, foreign investors' net buying is likely to continue at the beginning of the year."

◆ Inflation Approaching Peak = Positive views on inflation are also being raised. Last year, the consumer price index rose 2.5% year-on-year, exceeding the highest level in 10 years. However, it is expected that the surge in prices driven by petroleum prices will calm down as the effects of the fuel tax reduction policy gradually become visible.

Da-eun Lee, a researcher at Daishin Securities, said, "Looking at the recent price rise, supply-side factors still dominate but show signs of gradual slowdown, while demand-side upward pressure is gradually expanding," and predicted, "This year's inflation rate will stabilize at around 2-3%, slightly exceeding the Bank of Korea's target."

◆ China's Easing Monetary Policy = China's easing monetary policy to reduce corporate financing costs is also expected to influence the expansion of preference for risky assets. The People's Bank of China lowered the reserve requirement ratio by 0.5 percentage points from the 15th, supplying liquidity worth 1.2 trillion yuan (about 216 trillion won) to the market. On the 20th, it lowered the Loan Prime Rate (LPR) for the first time in 20 months, reducing the one-year maturity rate by 0.05 percentage points to 3.8%. Following China, the European Central Bank is expected to maintain interest rates and continue asset purchases, and the Bank of Japan is also expected to maintain an easing monetary policy stance by activating loan programs.

Jaeman Lee, a researcher at Hana Financial Investment, analyzed, "The reversal of domestic companies' sales estimates is likely to proceed based on China's economic improvement, supply-demand improvement, and easing of dollar strength," but added, "However, in the case of domestic companies, there is a strong tendency for operating profit margins to decline when sales increase."

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