[Dollar Dominance] ① US 'Exports Inflation with Strong Dollar'... Increased Price Burden on Han Economy

Major Currencies Weaken Amid Strong Dollar
Reverse Currency War... No Forces to Check Dollar
Korean Economy Faces Rising Inflation and Capital Outflow Pressures

"The U.S. economy shows no signs of weakening, but other countries are not showing clear signals of economic recovery. For the time being, the dollar is expected to remain strong while other currencies stay weak." (Sung Tae-yoon, Professor of Economics, Yonsei University)

"In the past, there was some balance of power, but now the power of the U.S., especially the Federal Reserve (Fed), is so great that other currencies like the yuan or yen are hardly visible." (Gong Dong-rak, Researcher at Daishin Securities)

The value of the dollar continues to soar due to the strong U.S. economy and prolonged tightening by the Federal Reserve (Fed). Since the economic conditions of major countries such as Europe and China, which could check the dollar's dominance, are still not as good as those of the U.S., the dollar is expected to maintain a high value for a considerable period. Although the Korean economy has recently shown a moderate recovery, analyses suggest that the combined burden of high oil prices and a strong dollar could create a challenging situation.

According to the financial and foreign exchange markets on the 26th, the dollar index, which shows the value of the dollar against six major currencies, has risen sharply to 105.9. After falling to 99.77 in mid-July, the dollar index has continuously risen, even breaking through 106 during trading hours, marking the highest level since November last year. Meanwhile, major currencies other than the dollar have not been able to avoid weakness. This year, against the dollar, the yen has fallen 11.53%, the yuan 5.64%, the won 5.39%, and the euro 0.57%. It is essentially a phase of dollar dominance.

Winner of the Reverse Currency War is the U.S.…Only the Dollar is Strong

Many analyses suggest that this dollar strength reflects the U.S.'s intention. Since last year, most major countries, including the U.S., have been fighting inflation, and when the dollar value rises, it reduces inflationary pressure for the U.S. When the dollar strengthens, the U.S. can import the same goods at lower prices, while other countries face higher import prices for energy, food, and other items priced in dollars, increasing their inflation burden.

In the past, countries competitively lowered their currency values to boost export competitiveness in a 'currency war,' but since last year, they have been engaged in a 'reverse currency war' to raise their currency values, also due to inflation concerns.

In fact, the U.S. has historically responded actively to prolonged strong dollar phases. In 1985, the Plaza Accord raised the value of Japanese and German currencies, and in 1988, the U.S. even created laws to designate currency manipulators to curb the depreciation of the Chinese yuan. More recently, Presidents Barack Obama and Donald Trump emphasized that "currency manipulation violates international trade laws," blocking dollar strength against the currencies of Japan, Germany, China, and South Korea.

However, the current strong dollar is induced out of necessity. Professor Ha Jun-kyung of Hanyang University’s Department of Economics explained, "In the past, when inflation worries were not significant, countries engaged in currency wars to increase exports, but since last year, they have been exporting inflation through reverse currency wars. For the U.S., inflation is the most important issue, so it is moving toward a strong dollar."

"U.S. Has Room for Economic Growth and Tightening"…Strong Dollar to Continue

Experts foresee that the strong dollar phase may continue for a considerable time. The U.S. labor market is strong, and the economy is good, giving the Fed room to raise interest rates further to stabilize inflation. However, other major countries like China and Europe are struggling economically and find it difficult to follow the U.S. in tightening monetary policy. Indeed, the Bank of England (on the 21st), the People's Bank of China (on the 20th), and the Bank of Japan (on the 22nd) recently all kept their interest rates unchanged.

Meanwhile, Fed Chair Jerome Powell said at last week's Federal Open Market Committee (FOMC) regular meeting press conference, "We will maintain a tight monetary policy until we are confident inflation has declined and stabilized at the policy target level." Recently, key Fed officials such as Michelle Bowman, Mary Daly (President of the Federal Reserve Bank of San Francisco), and Susan Collins (President of the Boston Fed) have also made hawkish remarks, stating that further tightening is necessary.

If U.S. inflation and the Fed's tightening stance completely ease in the future, the strong dollar may weaken compared to now, but until then, the dollar is likely to remain at a higher level than in the past. Gong Dong-rak, a researcher at Daishin Securities, said, "The U.S.'s strength is lasting longer than expected, so the strong dollar trend will continue but will diminish somewhat after next year. Depending on the U.S. economic conditions and monetary policy issues, the dollar will maintain a high level for the next year."

Jo Byung-hyun, a researcher at Daol Investment & Securities, analyzed, "If the Fed's rate hikes conclude, the pressure for dollar strength may somewhat ease, but from the perspective of interest rate differentials, it is difficult to expect meaningful pressure for dollar weakness."

Strong Dollar Won't Ease Easily…Concerns Over Korean Inflation and Capital Outflows

If the strong dollar continues for a long time, the burden on the Korean economy will inevitably increase. The negative effects from rising import prices outweigh the benefits of export support due to the won-dollar exchange rate increase. If companies face higher raw material costs, production costs rise, which hits export-oriented manufacturing in Korea hard. Professor Sung Tae-yoon of Yonsei University said, "Generally, exchange rate increases help our exports, but recent poor export performance is more related to semiconductor market downturns than prices. Exports have not benefited much from won depreciation, while inflationary pressure has increased."

With expectations of high U.S. interest rates, U.S. Treasury yields also rose last week to their highest level since 2007 for the 10-year bond. As the U.S. absorbs liquidity like a black hole, foreign securities investment funds are flowing out of Korea like a receding tide. According to the Bank of Korea, foreign stock funds saw a net outflow of $910 million (about 1.2171 trillion KRW) last month, and bond funds had a net outflow of $790 million (about 1.056 trillion KRW). If the Fed raises rates further within the year, pressure for foreign investor capital flight may increase.

Considering the Fed's active tightening monetary policy's impact on global financial and foreign exchange markets, there is also analysis that the won-dollar exchange rate may rebound further. Jung Yong-taek, a researcher at IBK Investment & Securities, explained, "Given that expectations for U.S. tightening strength are approaching the level of last October, when they were highest, the won exchange rate will naturally face additional upward pressure. Due to China's economic sluggishness, another major factor affecting the won, the 1,300 won level is solidifying as the new equilibrium."

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