Asia’s Central Banks Revamp Currency Defence to Protect Reserves
Central banks in emerging Asia are progressively identifying methods to bolster their currencies without utilising foreign-exchange reserves, as ongoing tensions in West Asia and the likelihood of sustained elevated US interest rates maintain a state of unease among policymakers. India has attracted nearly $40 billion from its diaspora thru high-yield dollar deposits, supporting a recovery in the rupee from a record low in May. South Korea’s initiative to expedite corporate dollar repatriation has resulted in the won achieving its most significant monthly increase since 2022. Indonesia attracted $1.6 billion in bond inflows over the past two months by providing incentives to foreign funds, while Taiwan has been advising exporters to sell US dollars during periods of currency weakness. The measures expand the options available to policymakers, complementing conventional instruments like interest-rate increases and foreign-exchange interventions that constituted the initial response following the Mideast conflict, which triggered a surge in oil prices. The spike revealed emerging Asia’s significant dependence on energy imports, positioning the region as one of the most vulnerable segments of the currency market.
Although oil prices have moderated due to indications that the US and Iran are approaching an agreement, a number of Asian currencies continue to be among the poorest performers this year. “There are a variety of motivating factors, but they essentially come down to preserving FX reserves as best as possible amid structurally higher volatility and uncertainty,” said Claudio Piron. “Additionally, they are trying to balance the needs of protecting FX stability, while maintaining domestic liquidity. Attracting inflows is a key strategy to achieve this goal.” Indonesia’s rupiah, the Indian rupee, and Thailand’s baht are positioned among the five least successful currencies this year within a group of 22 emerging-market currencies. In contrast, currencies from Latin America dominate the rankings, with the Colombian peso, Brazilian real, and Mexican peso leading the way. The region presents elevated interest rates compared to the majority of its counterparts in the developing world, with numerous countries being oil exporters, thereby rendering them comparatively shielded from the effects of rising oil prices. “On a total-return basis, Latin American currencies may retain an advantage” because of their higher carry, said Desmond Fu. “On a spot basis, however, selected Asian currencies could close part of the gap if US yields stabilize, energy-market disruption doesn’t intensify and the AI investment cycle continues to support technology exports and regional capital expenditures.”
Several other analysts, including those at Alpine Macro, State Street Investment Management, and M&G Investments, express that the degree of weakness in Asian currencies has been unexpected, considering a combination of favourable factors such as trade surpluses, strong macroeconomic fundamentals, healthy exports, and vibrant equity markets throughout the region. “This suggests that the imbalance lies more in the composition of capital flows than in trade fundamentals, meaning FX intervention alone may not be sufficient to address currency weakness,” said Low Guan Yi. “Against this backdrop, we expect policymakers to continue broadening the sources of foreign currency inflows.” Meanwhile, in Japan, Asia’s largest developed market, policymakers seem to be increasingly relying on foreign-exchange intervention. The first joint yen-buying operation from Japan and the US since 1998 recently contributed to one of the currency’s most notable rebounds. To be clear, EM Asia central banks are not relinquishing their conventional safeguards. Bank Indonesia raised interest rates by 100 basis points in May and June and has maintained its intervention in the currency market, similar to its counterpart in India.
The two countries, in conjunction with the Philippines and Thailand, have experienced the most significant reductions in foreign exchange reserves in Asia since the onset of the Iran war, with decreases ranging from 4% to 9%. Authorities in the Philippines have increased rates by 50 basis points, while the Bank of Korea implemented a policy tightening for the first time in three years last month. MUFG Bank Ltd. is projecting two additional rate hikes by Indonesia and the Philippines, along with a minimum of one more increase by the Bank of Korea this year. The trajectory of US monetary policy continues to be crucial for investors, particularly following the dissent expressed by three Federal Reserve officials regarding last month’s decision to maintain steady rates. The dissenters also cautioned that delaying action against inflation could necessitate more aggressive policy measures in the future. “Asian central banks are keeping more firepower given the greater uncertainty around global events including how oil prices, El Nino, US yields and the dollar may eventually pan out,” said Michael Wan. “Attracting more dollars will be one prong of the strategy.”
