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The Korean won has made swift gains against the US dollar in October. While the exchange rate shot up to 1,285 won per dollar in March soon after the outbreak of the COVID-19 pandemic, the rate has recently been falling steeply and is now approaching the 1,130 won line. That drop appears to be driven by expectations about more economic stimulus packages from the US and the strong performance of the Chinese yuan.

On Oct. 21, the US dollar finished trading at 1,131.9 won on the Seoul foreign exchange market, down 7.5 won from the previous day. The closing value was the lowest since Mar. 22, 2019, when the exchange rate stood at 1,130.1 won. The won-dollar exchange rate has dropped 24 won (currently around US$0.02) this month alone. That represents an average daily decrease of 2.9 won, triple the figure (0.9) from September.

The decline in the won-dollar exchange rate seems to represent the increasing likelihood that the US will pass an additional economic stimulus package worth up to US$2.2 trillion and the continuing strength of the Chinese yuan, which has been buoyed by China’s recent economic recovery. Another economic stimulus package in the US would increase the dollar supply, likely suppressing the value of the dollar.

Since China is one South Korea’s major export markets, the recovery of China’s domestic market would also strengthen the won, in addition to the yuan. The value of the yuan against the dollar remained fairly constant for the three months from March (7.16 yuan) to the end of June (7 yuan). But since then, it has been falling rapidly, hitting 6.9 yuan at the end of July and 6.67 yuan by Oct. 20. The currency changes reflect China’s containment of COVID-19 and the beginning of an economic recovery. The last time a dollar traded for 6.67 yuan was over two years ago, on July 26, 2018 (6.79).

While foreign exchange experts generally expect that the won will continue to strengthen, they also note that the rate could taper off because of the sudden fluctuations in recent days.

“Since China and South Korea have been relatively less damaged by COVID-19 than other countries, their currencies could perform strongly against the dollar in the long term. For now, though, the drop in the two exchange rates has been so extreme that we’ll probably see a short-term correction,” said Kong Dong-rak, an analyst with Daishin Securities.

Kong predicted that the won-dollar exchange rate would hover around 1,120-1,130 for the time being.

Since the recovery in South Korean exports will be slow and since China has taken measures to adjust the speed of the yuan’s appreciation, I think the currencies will stay at their current level until the end of the year rather than strengthening further,” said Kim Hyo-jin, an economist at KB Securities.

On Oct. 10, the People’s Bank of China eliminated a reserve requirement for currency forward contracts while stressing the stability of the yuan exchange rate.

Major variables including the outcome of the US presidential election are also leading analysts to predict cooling volatility in exchange rates. “In the long term, the US dollar will show weakness, but for now, the dollar is likely to depreciate more slowly because of uncertainty about the US presidential election and because of the weakness of the euro amid a new surge of COVID-19 in Europe,” said Heo Jin-uk, an analyst with Samsung Securities.

Park Sang-hyun, an analyst with Hi Investment & Securities, offered a different take. “Considering that the Democratic Party is expected to win the US presidential election and that the Chinese government might use the exchange rate as an important policy tool, the appreciation of the yuan could take it as low as 6.28 yuan to the dollar. We could also see the won-dollar exchange rate fall even further,” Park said.

The possibility that a Democratic victory could mitigate the US-China trade dispute, the relatively rapid recovery of the Chinese economy, and the Chinese government’s attempt to simultaneously stimulate exports and domestic demand could lead to appreciation of both the yuan and the won, Park said.

By Shin Da-eun, staff reporter

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