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Steven Han on Global Economy

How the Biden win will affect the won-dollar exchange rate

Nov 15, 2020 (Gmt+09:00)

Sang-Chun Steven Han
The won-dollar exchange rate, which has been declining since the breakout of the COVID-19 pandemic, is falling faster since Joe Biden was elected as the 46th president of the US. In a time of political turbulence in the US, the path of won/dollar exchange rate is of key interest to the market.  Any changes the Biden administration could make to its dollar policy, recognizing America’s importance as a key currency country, would affect the South Korean economy. A stronger won, therefore a weaker dollar, will present a major challenge for South Korea’s exports.  

The declining won-dollar exchange rate trend, however, does not mirror domestic economic factors.  Even amidst the COVID-19 pandemic, the South Korean economy is reportedly doing better than any other OECD country, thanks to the government’s effective management of the pandemic since the beginning.  Since last March, the US dollar deposit balance has steadily increased. In the domestic stock market, foreign net selling had continued until the news of a newly elected US president. Exports show continuous declines too.

The continued strength Korean currency is caused by many factors. Broad weakness in the US dollar is a major factor helping to the drive won. The Trump administration’s weakening of the dollar to reduce the US trade deficit with China, a pledge made by then-candidate Trump in the 2016 presidential campaign, did bring down the value of the dollar. And the US-China trade war did not become "a currency war," as China responded with ‘"e-dollarization" by drastically cutting use of the dollar and reducing its dependence on the dollar, further deteriorating the dollar's value.

The fast-appreciating Chinese yuan is another factor in the declining won-dollar exchange. The yuan jumped closer to 6.6 yuan to the dollar this month, a stronger-than-expected comeback from the 7.5 yuan-dollar rate seen in the wake of the Hong Kong protests. China’s a V-like economic recovery (-6.8% in Q1; Q2 3.2% in Q2; 4.9% in Q3), after the initial outbreak of Covid-19 in Wuhan, has been reflected in the recent yuan strength. The issuance of a new digital currency and payment made by Petroyuan, an official yuan currency used for oil payment, are likely to strengthen the value of yuan in global economy.  

It needs to be pointed out that the yuan’s value is appreciating even faster following the news of Mr. Biden’s victory. If Biden is to pursue a bigger stimulus package, with the fiscal deficit and national debt burden that entails, the value of the dollar will fall further. The yuan’s strength, therefore, is attracting foreign capital. Foreigners and their money have been pouring into China’s asset market this year. There is an expectation among many observers that the value of yuan will appreciate below 6 to the dollar.

There is also the question of what will happen to Japan's Abenomics, and how what remains of these policies will affect the won-dollar exchange rate. There is little doubt that Yoshihide Suga’s new government will maintain Abenomics. Many economists predict that with Suga’s succession, however, the Japanese economy will suffer, and the value of yen will increase over time. If the dollar continues to weaken, the yen strengthens. With the Biden administration leaving the exchange market to the market, it will be increasingly difficult to closely control the currency.

It is imperative for the Korean government to have contingency plans for influences and factors that are coming from abroad.  Most important, the government must be prepared for the possibility of drastic drop of the won-dollar exchange rate to aid domestic dollar investors and businesspeople. If the yuan reaches the value of 5 to the dollar, the Korean won could fall below 1,000 won or further when we take consideration the coefficient index between the yuan and the won.

Excessive intervention to the market, however, should be avoided, so as not to be labeled a currency manipulator. To prepare for the strong won, local companies should build better products for export by exceling in design, quality and technology to overcome the price barrier. The government, then, should implement better policies for aiding and funding these companies. To reduce the risk of foreign exchange loss, institutional devices, such as the reduced holding position policy, should be put in place investors and companies. It is critical to have a cooperation plan with the Biden administration for mutual benefit.

 
By Sang-Chun Steven Han

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