The APEC Leaders Meeting is just a few days

The APEC Leaders Meeting is just a few days away. There are many events to be held this Wednesday and Thursday. Not only the APEC Leaders Meeting but also major companies’ performance announcements, the FOMC’s decision on interest rates, the BOJ and the ECB’s monetary policy meeting… We have a lot of events waiting for us. For each event, we’re going to follow up with a weekly essay. Today, I’d like to talk about the dollar’s strength, which has been growing anxiety recently.

The dollar exchange rate was close to 1440 won, and it’s not easy to push it down… When I talk to people who invest… I feel like the fear of the dollar strengthening is even greater. And of course, I’m thinking that in the long run, the dollar is going to be stronger than it is now, but the short-term exchange rate outlook is so eventually variable that it’s often difficult to predict. But, well, a lot of people seem to be thinking about the dollar strengthening.

The dollar’s strength this time is a little unique… The dollar index is down more than 10 percent from its peak in April, indicating a weak dollar in foreign media, while the won-dollar exchange rate once again topped the 1,430 won mark, leaving the won-dollar appreciating pressure still high. To sum up… Euro > Dollar > It’s KRW… If you look at the eurozone, it’s a weak dollar. If we look at it, it’s a strong dollar… There’s a strange dollar strengthening, which I often get asked… Do you think it’s possible for the dollar exchange rate to fall… Of course, we don’t know when, but… In the short term, investment negotiations with the U.S. of $350 billion are intertwined… I believe that attention should be paid to the upcoming APEC Leaders Meeting, in which discussions on exchange rates between the U.S. and China, and between the U.S. and Japan, are likely to be made. This may be wishful thinking, but… As the trade war with China intensifies… As the U.S. needs to strengthen its cooperation system with other countries, it demonstrates TACO… If we postpone the U.S.-China tariff war for a certain period of time and conclude tariff consultations with South Korea on more relaxed terms… I think that the dollar exchange rate will stabilize not only the yuan exchange rate, but also the dollar exchange rate. This is not the market watcher’s point of view, it’s the wish of the people… I’m looking forward to even a small possibility…

And from a longer perspective, we are thinking about changes in the factors that are pushing up the dollar’s exchange rate structurally in recent years. I quote what Governor Lee Chang-yong mentioned about the exchange rate right after the Bank of Korea’s Monetary Policy Committee. Let’s read it for a moment.

“There is a lot of foreign securities investment, which is putting upward pressure on the exchange rate. This year, there are almost four times more funds going abroad than there are coming in, and a considerable amount of funds are moving abroad from the private sector. It is difficult to confirm specifically whether this phenomenon is due to exchange rate expectations or other factors overlap. Overall, I think that a reasonable conclusion of tariff negotiations will help lower the exchange rate.” (News 1, 25. 10. 23)

Yes… The scale of our investment in overseas securities… It’s four times more than the amount of investment coming into Korea from overseas. Just three or four years ago, I didn’t really consider the West Ham ant when looking at the exchange rate, but now it’s a necessity. Their active investment in U.S. stocks is having a significant impact. So why is foreign investment happening… This is because there are high expectations that U.S. investment will bring higher returns than Korea. So they’re going to sell the Korean won, buy the dollar, buy the U.S. stock. The U.S. stock price is going to go up, the dollar is going to go up. But if this expectation goes down… Now, the money is going to flow back from the U.S. to Korea. So the U.S. stock price is going to fall out, sell the dollar, exchange it to the Korean won, and then the won goes down. And in a changed world, the correlation between assets is different than it was in the past. In the past, when U.S. stocks faltered, there was a strong dollar, which is a safe asset, but now when U.S. stocks falter, the dollar falls… In other words, you can see a picture of the dollar going down. It’s a different picture from the past… The popularity of the U.S. asset market… seems to have a significant impact on the exchange rate, and there’s a recent talk about the National Pension Service. Let’s quote the article.

“Koo Yoon-chul ‘Agree’ to Point on Stimulating Demand for Dollar to Reduce National Pension Exchange Hedge” (Yonhap Infomax, 25.10.14)

This is what Deputy Prime Minister for Economic Affairs Koo Yoon-chul said at the National Assembly. The National Pension Service has increased overseas investment… The fact that the foreign exchange hedge was also reduced has stimulated demand for dollars. If the big hand of the national pension buys dollars… The demand for the dollar is increasing.. It acts as an upward pressure on the exchange rate, if there is an abnormal rise in the exchange rate… Not only individual foreign investment, but also pension