Fed Forces Asia to Choose: Accept Weaker Currencies or Push Back
Fed’s Hawkish Cut Puts Asian Currencies in a Bind
Asian central banks face a tough choice: fight a strengthening dollar or watch their currencies weaken.
The Federal Reserve’s recent interest rate cut, coupled with hawkish signals about future inflation concerns, sent shockwaves through Asian currency markets on thursday. The Indian rupee plunged to a record low against the U.S. dollar, while the Korean won tumbled to its weakest level since the 2008 financial crisis. the Bloomberg Asia Dollar Index, a measure of the region’s currencies against the greenback, dropped by nearly 0.4%.
This renewed pressure on Asian currencies raises questions about how far central banks in the region are willing to go to defend their exchange rates. Despite the Fed’s rate cut earlier this year,Asian currencies have already lost almost 4% against the dollar.
“It is indeed hard to fight the higher dollar move against Asian currencies when it is primarily dollar driven,” said Wee khoon Chong, a strategist at BNY Mellon in Hong Kong. “Regional central banks would have to play defense and try to smooth out depreciation pressure to try to keep an orderly FX market.”
Divergent Approaches Emerge
Asian central banks are adopting varying strategies to address the strengthening dollar. Bank Indonesia has been vocal about its recent interventions in the domestic market, signaling its commitment to supporting the rupiah. The Reserve Bank of India has employed a mix of offshore and onshore contracts to bolster the rupee, but has remained tight-lipped about its recent actions. Other central banks have simply stated they are closely monitoring the situation.
China,meanwhile,has stepped up its support for the yuan. On Thursday, the People’s Bank of China set a daily reference rate for the yuan that was significantly stronger than market expectations. This “fixing,” which limits the yuan’s movement by 2% on either side, is at its strongest level relative to forecasts since July.
“The PBOC will continue to restrain the upside pressures on dollar-yuan for now,” said Alvin T. Tan, head of asia FX strategy at RBC Capital Markets. “But I think the exchange rate will break to new highs in 2025 on the outbreak of a second US-China trade war.”
Chinese state banks also reportedly sold dollars in the onshore market at the open, further indicating Beijing’s determination to curb the yuan’s depreciation.
The Fed’s hawkish pivot
The latest currency turmoil stems from the Fed’s so-called “hawkish cut.” While the central bank did reduce interest rates, its accompanying statements signaled a renewed focus on inflation concerns. Median forecasts from Fed policymakers now project only a half-percentage point of rate cuts next year,half of what was anticipated in September.
This shift in focus marks a departure from the Fed’s stance in September, when officials were more concerned about the health of the labor market. Fed Chair Jerome Powell acknowledged on Wednesday that the central bank’s year-end inflation projection “has kind of fallen apart.”
The Fed’s hawkish pivot has left Asian central banks grappling with a challenging dilemma: intervene to support their currencies and risk depleting foreign reserves, or stand by and watch their currencies weaken, possibly fueling inflation and capital flight.The coming weeks will reveal which path they choose.
Battling the dollar Wave: Asian currencies Face a Fed-Fueled Dilemma
NewsDirectory3 Exclusive interview
The Federal Reserve‘s recent interest rate cut, alongside hawkish signals regarding future inflation concerns, has sent shockwaves through asian currency markets. We spoke with Wee khoon Chong, strategist at BNY Mellon in Hong Kong, to untangle this complex situation.
NewsDirectory3: Mr. Chong,the Indian rupee has hit a record low against the dollar,while the Korean won is at its weakest point since the 2008 financial crisis.What factors are driving this renewed pressure on asian currencies?
Wee khoon Chong: It’s difficult for Asian currencies to withstand this surge in the dollar,which is primarily driven by actions from the Fed. Regional central banks will likely play a defensive role, attempting to smooth out depreciation pressure and ensure orderly FX markets.
NewsDirectory3: What strategies are Asian central banks adopting to address this strengthening dollar? We’re seeing varied approaches across the region.
Wee khoon Chong: Correct. Some central banks are more vocal than others. we’ve seen Bank Indonesia openly intervening in the domestic market to support the rupiah. The Reserve Bank of India is utilizing offshore and onshore contracts,but has been relatively quiet their recent actions. Others are adopting a wait-and-see approach, closely monitoring the situation.
NewsDirectory3: China, simultaneously occurring, appears to be actively intervening to support the yuan. What’s driving this stance?
Wee khoon Chong: The People’s Bank of China is setting strong daily reference rates for the yuan, limiting its movement against the dollar. This, combined with reports of state-owned banks selling dollars in the onshore market, indicates Beijing’s commitment to curbing yuan depreciation.
NewsDirectory3: The Fed’s “hawkish cut”—reducing rates while emphasizing inflation concerns—seems to be at the heart of this issue. How is this shift in stance impacting Asia?
Wee khoon Chong: This hawkish pivot from the Fed creates a tough dilemma for Asian central banks.They are forced to choose between intervening to support their currencies, risking depletion of foreign reserves, or standing by and watching their currencies weaken, perhaps leading to inflation and capital flight.