(Bloomberg) — The dollar’s renewed strength is sending Asian currencies to multimonth lows and prompting authorities in Japan and China to defend their weakened currencies.
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Japan on Wednesday issued the strongest warning in weeks against the yen’s rapid depreciation, with its top currency official saying the country is ready to act amid speculative moves in the market. Not long after, China’s central bank issued the most aggressive guidance on record for the yuan’s daily reference rate as the currency it manages weakens to levels not seen since 2007.
Inconclusive US economic data convinced some traders that the Federal Reserve would keep interest rates on hold for longer, sending the dollar soaring and Asian currencies to their lowest since November. That means policymakers across the region, who have spent the past year burning through their reserves to support environmental funds, are returning to the battlefield to take on hidden assumptions.
“Higher long-term US rates are putting pressure back on, and investors are cautious,” said Vijay Kannan, a macro strategist at Societe Generale SA in Singapore. “In particular, EM Asia is more vulnerable to this dollar strength due to very low interest-rate differentials and exposure to a weak Chinese growth outlook.”
It reignited fears of higher inflation, a move that would hurt expectations that Asian central banks would raise interest rates and attract local currency bonds. Indonesian and Thai bonds are both seeing outflows this month.
China’s grim economic outlook, built on months of disappointing data, is also weighing on sentiment in emerging market currencies.
The yen and yuan have been among the best performers among Asian currencies this year. While Japan has stopped using more aggressive instruments to support its currency, China has already sought to strengthen the yuan by asking state-owned banks to sell dollars.
Similar financial protection measures are in place elsewhere in Asia. Taiwan’s foreign exchange reserves fell in August for the first time in nearly a year as the monetary authority intervened in the market. And in Thailand, the central bank has warned that rapid movements in the baht could lead to intervention.
Still, there is skepticism that these measures are game-changers in the absence of a slightly hawkish Fed or consolidation in China’s economy. Morgan Stanley weighed on emerging market currencies this week, saying those in Asia are vulnerable to a slowdown in China’s growth.
Alvin T. Tan, head of emerging market currency strategy at RBC Capital Markets, said: “The immediate implication of a stronger US dollar is that most Asian central banks will not loosen monetary policy.” Singapore.
–With help from Ruth Carson and Neha D’Silva.
(Updates with Commentary)
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