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[Economic Opinion] Implications of the Weak Dollar

weeks after almost all the votes have been counted, still there lingers dense political uncertainty caused first by the Trumpean reluctance to accept the outcome of the presidential election of 2020, and second by the Republican denial to cooperate with the Congress. Indeed, it is quite unprecedented that the outgoing president after losing the election strongly defies the vote counts of the individual States, suspends all the legitimate transition services to the president-elect, and proclaims the intention to begin the non-existent second term. This casts further bafflement as they are influencing the Congressional emergency legislative actions.

The Congress has been wrestling with the emergency spending measures for a few months but a mutually acceptable compromise seems even more difficult to achieve after the November election as Trump and his administration vehemently oppose any cooperation with President-elect Biden and Democrats in Congress. This non-conformity in the legislature has rendered a pause on all the emergency funding to the COVID-19 victims, especially SMEs and tens of millions of the unemployed. In fact, the size difference of the emergency measures were not as dramatic as the political war between the two parties. The Democrats’ package asked for USD 2.4 trillion, while the Republican administration led by Secretary Mnuchin could only reach an agreement of up to USD 1.9 trillion, the gap being a mere USD 0.5 trillion, about 25 percent. But the nitty gritty of the quarrel was reported, detailing that the Democratic Party wants the money to support states and local governments with financial difficulties, while the Republicans have asked to protect companies from lawsuits related to the pandemic. Because of the rather trivial stalemate, the entire USD 2 trillion has come to sit idle on the floor for months.

This endless political tug of war between the two political rivals has dealt a big blow to the financial world by causing stock prices to tumble and interest rates to severely gyrate after the election. Now, the real economy of the U.S. is not expected to recover shortly after the election with the congressional assistance, and it remains uncertain whether we will see recovery before February 2021 when the 118th Congress begins its new session. Secretary Mnuchin threw cold water upon the slim hope of mutual agreement when he recently announced that nine emergency funding programs will not be extended beyond December 31, 2020.

President-elect Biden and the Democrats were outraged by Mnuchin’s pushback but they could do nothing under this political “dark age” at least until next February. Quixotic presidential behavior and the lack of smooth cooperation in the legislature has made not only the short run economic recuperation highly improbable, but also made the longer run smooth transition of the administration more difficult. Indeed, this political eclipse casts severe uncertainty to the financial world. The global stock markets were engulfed with the politico-economic risks as almost all the global stock indices have been staggering since the November election, with the interest rates showing unusual tremors.

Such political aspects have damaged not just the prospects of the stock markets but the strength of the US dollar. In fact, the value of the dollar has become quite strong in 2018 and throughout 2019. But it began to decline on March 20, 2020, when the dollar index was highest at 103.6. By the month of November, it has lately fallen more than 10 percent to 92. The weak dollar is particularly concerning for Korea as it hinders trade as well as investment. The weak dollar means a strong Korean won, and this makes Korean export products more expensive in the global markets. Of course, the extent of the negative effects of the weakening dollar would be mitigated by the strength of competitors’ currencies like the Japanese yen and Chinese yuan, but still the effect should be formidable as most export products are denominated in the US dollar.

On the other hand, foreign investment out of Korea will surge as it becomes relatively less expensive due to the stronger won. In particular, the stronger won will give a very distinct incentive for existing investors to start repatriate their previous commitments to capitalize on the exchange rate benefits. Increased incentives for outbound investment coupled with expanding dis-incentives for inbound foreign investment due to weak dollar could be an obstacle for maintaining economic vitality and innovating new technology. So far, little attention has been given to exchange rate movements because it has been pretty stable for some time. But now, everything is expected be reshaped and reformed under the new Biden administration, especially trade policy, interest rate policy, and the exchange rate policy.

At this moment, nothing is clear. The political landscape as well as the financial terrain are as foggy as the future destiny and prospect of COVID-19. When everything stays in the darkness, it is imperative for Korea to further focus on promoting vitality in its investment environment.

By Professor Se Don Shin
Dean, Sookmyung Women’s University

The opinions expressed in this article are the author’s own and do not reflect the views of KOTRA

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