Won to continue gaining ground against dollar in 2021

Dealers at Hana Bank monitor the benchmark KOSPI and the won-dollar exchange rate at its head office in Seoul on Dec. 17. Yonhap

By Lee Min-hyung

Korea's local currency is expected to keep gaining ground against the U.S. dollar throughout 2021, as the supply of dollars will be on the rise in line with the stronger expansionary fiscal policies employed by the U.S. government, market experts said Tuesday.

The won-dollar exchange rate declined to as low as the 1,080-won range in early December, as investors have turned their eyes to risky assets amid rising expectations for the U.S. authorities' upcoming pump-priming measures. The development of COVID-19 vaccines is also considered one of the crucial factors enhancing the valuation of currencies in emerging markets.

According to data from the Bank of Korea, the average won-dollar exchange rate in November reached 1,116.76 won, down by 4.3 percent from a year ago. The figure is also a decline of 2.4 percent from a month earlier.

Experts said the exchange rate fall would likely continue until the end of next year, as the U.S. government is set to activate a variety of liquidity expansion programs soon after president-elect Joe Biden takes office early next year.

“But as the Korean government is on high alert over a sharp tumble in the exchange market, the won-dollar exchange rate will be set around the 1,100-won level next year possibly on a range of 1,090 won and 1,100 won,” Kim Dae-jong, a professor of business administration at Sejong University, said.

“Exports will be hit hardest by the falling exchange rate, and the government will keep taking steps to avoid the scenario due to Korea's high dependency on exports.”

Financial authorities here are paying close attention to the sharp decline of the won-dollar exchange rate, as this will cause market instability and worsen the earnings results of the nation's export-driven companies.

With Biden picking Janet Yellen as the country's next Treasury secretary, the U.S. government is expected to take more aggressive expansionary policies, as she is among the most dovish monetary policymakers in the country, according to the professor.

“The Biden administration will take steps to expand liquidity on the market,” he said. “U.S. stock markets generally report two-digit growth in the first year of a new president on hopes for economic growth, which will end up weakening the dollar's valuation against the won.”

The exchange rate surged to as high as around 1,280 won in early March this year, but it has since been on a downward curve, reaching below 1,100 won until recently. As of Tuesday, the U.S. dollar is traded at around 1,108 won here. The increasing fear surrounding a third wave of the coronavirus infections here has in recent days posed upward pressure on the exchange rate, blocking any foreign capital influx.

Choi Kwang-hyuk, an analyst at eBest Investment & Securities, noted that the Korean won would likely keep strengthening its value next year, but the won-dollar exchange rate will not be on track for a radical decline.

“It is likely that the U.S. dollar will lose additional ground against won with a temporary undershooting in early 2021,” he said. “The exchange rate may fall to as low as 1,032 won per dollar, but the status quo appears to be a moderate level, considering Korea's economic growth.”