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The U.S. dollar returns strongly and the “currency defense war” in emerging markets begins again

2024-04-16

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Currency intervention has become a key battleground in emerging markets, particularly in Asia, as the dollar's latest rise puts pressure on officials to act.

Officials in South Korea, Thailand and Poland said they were paying close attention to currency fluctuations or made clear they would intervene if necessary, and Indonesia sold dollars further.

Last week, U.S. inflation data came in higher than expected, dampening bets on a rate cut by the Federal Reserve and suggesting the battle against a stronger dollar won't be over soon. At the same time, rising Middle East tensions between Israel and Iran are also likely to trigger a new surge in safe-haven demand for the U.S. dollar.

"Right now, we do see a lot of verbal intervention from different central banks," said Marcela Chow, global market strategist at JPMorgan Asset Management in Hong Kong. She told Peng in an interview that given the Fed seems unlikely to ease policy anytime soon, she said in an interview with Peng "Asian currencies may weaken further, which may indicate that more verbal intervention may be needed".

The increase in central bank activity is just another area of conflict caused by the Fed's shift to keeping interest rates higher for longer. Traders have been scaling back bets on expected U.S. interest rate cuts in recent months amid erratic consumer price data, a sign that policymakers in emerging markets still have plenty of work to do.

Support local currency

Thai policymakers face a severe test in trying to support the baht, which has fallen about 6% this year. Their approach has been to use various rhetoric to try to make the Thai baht appreciate.

"The Committee will continue to closely monitor foreign exchange market fluctuations," policymakers said at a meeting on April 10. They kept interest rates unchanged at their most recent meeting, defying Prime Minister Srettha Thavisin's desire to stress the need for easing policy, to raise interest rates. Vibrant currency.

The Central Bank of Poland reiterated at its meeting on April 4 that it may intervene to support the Polish zloty. After keeping interest rates unchanged, policymakers said a stronger local currency would help curb inflation.

Bank of Korea officials said they were closely monitoring the won's exchange rate after the won came under pressure last week. Bank of Korea official Oh Kum-hwa said Governor Lee Chang-yong's speech on the currency on Friday contained verbal intervention terms.

Sell the dollar

Indonesia's central bank went a step further and bought rupiah to limit losses. Bank Indonesia Governor Perry Warjiyo has said that intervention and the sale of high-yield securities will be the main means to support the currency this year.

Their last official move was on April 2, when the rupiah fell to a four-year low. However, in the case of Indonesia, it's not just a dollar issue: the rupiah has also come under pressure due to concerns about new President Prabowo Subianto's spending plans.

Peru’s central bank surprised economists with its interest rate cut last week. Peru’s central bank is said to have been selling U.S. dollars frequently in recent months as it seeks to boost the Peruvian sol. Officials have said in the past that the goal of the intervention is to reduce currency volatility.

Although not primarily in response to the dollar, the Bank of Israel sold dollars in an unprecedented move to protect the shekel after Hamas launched an attack last October.

Many of the most interventionist central banks are in Asia, where currencies have fallen the most over the past month.

"Asian central banks cannot let their guard down," said Paul Mackel, head of global foreign exchange research at HSBC Holdings Plc in London. Given that a weak currency tends to exacerbate price pressures, "it may also mean that, in practice, the last mile of inflation is difficult not just for the U.S. but for many different economies," he said.

Is it time to buy?

But while there are few signs that the dollar's gains are about to slow, some analysts at least believe now might be a good time to start a return to some battered currencies.

David Chao, a strategist at Invesco Asset Management in Singapore, said that the possibility of the Federal Reserve delaying an interest rate cut after the release of U.S. inflation data in March "increases the continued headwinds for Asian currencies." “This could be an opportunity to buy on the dip” in regional risk assets, he said.

The above information is provided by special analysts and is for reference only. CM Trade does not guarantee the accuracy, timeliness and completeness of the information content, so you should not place too much reliance on the information provided. CM Trade is not a company that provides financial advice, and only provides services of the nature of execution of orders. Readers are advised to seek relevant investment advice on their own. Please see our full disclaimer.

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The U.S. dollar returns strongly and the “currency defense war” in emerging markets begins again

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