Asia makes a stand as dollar threatens to upend currency markets
Asian officials went on the offense against the resurgent dollar, with some choosing to stand together but all united in their desire for currency stability.
The latest salvo came from Japan’s currency chief, who added weight to the matter by restating the Group-of-Seven’s commitment to preventing disorderly moves. Earlier this week, South Korea said it discussed currency concerns with Japan and vowed to counter drastic swings – winning a tacit nod from the US – while China also pledged to avoid excessive volatility in the yuan.
Policymakers in the region’s emerging markets have been more proactive in taking action, with Indonesia’s central bank dumping dollars in spot and derivatives markets to prop up the rupiah. Malaysian authorities said they stood ready to deploy tools to support the ringgit.
It’s been a turbulent week for foreign-exchange markets, as strong US data upended wagers on the Federal Reserve’s interest-rate cuts and bolstered the dollar. While the cascade of jawboning helped bring a sense of calmness to Asia on Thursday, the battle against bearish wagers may just be starting as the greenback looks set to reassert its might.
“There’s little anyone can do to fight the dollar strength,” said Eugenia Victorino, head of Asia strategy at Skandinaviska Enskilda Banken in Singapore. “Unless we see coordinated intervention among the big central banks, jawboning can only slow down the dollar strength – not stop it.”
The dollar has jumped about 4% this year, outperforming all major currencies. A delay of the keenly anticipated Fed pivot – which the market now expects to happen in September, according to swaps data – means Asian assets will stay unappealing due to elevated Treasury yields.
Pessimism toward non-dollar currencies peaked this week as another batch of US economic data surprised to the upside. There’s little sign of the economy’s strength letting up anytime soon, as figures this week are set to show jobless claims remaining low.
The yuan – which is seen as a regional anchor for foreign-exchange stability – added to the pressure, as it dropped to levels unseen since November earlier this week on signs the central bank would allow moderate depreciation.
Plaza accord
Currency weakness has been so drastic that it earned a line in the G-7 statement released Wednesday, which reaffirmed the members’ commitments outlined in May 2017. The agreement seven years ago acknowledged that disorderly movements in currencies can have adverse implications for economic and financial stability, essentially leaving the door open for intervention under certain circumstances.
Still, analysts say the malaise hasn’t reached a point where authorities across the region have to form an alliance and support their currencies in joint intervention. That was what happened in the mid-1980s, when the world’s most important finance officials imposed a resolution to weaken the dollar – an agreement known as the Plaza Accord.
The G-7’s commitment “is good enough to set up a psychological resistance for the dollar,” said Christopher Wong, a currency strategist at Oversea-Chinese Banking Corp. in Singapore. “This should provide an extended breather for some of the worst-hit regional currencies such as the won and yen.”
More painful volatility may still lie ahead for Asian and emerging-market currencies, as they continue to be whipsawed by a strong dollar and China’s sluggish economic recovery. Simmering geopolitical risks in the Middle East and upcoming US elections are likely to damp appetite for risk assets.
“We still assume that actual intervention will be more effective in anchoring the Asia foreign-exchange complex since the US dollar rally has been driven by diverging macroeconomic fundamentals and monetary policy stances,” said Homin Lee, senior macro strategist at Lombard Odier. “Authorities in the region will maintain that bias to intervene so that they can buy time before the second half when macro and policy divergence could start reversing.”
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With assistance from Malavika Kaur Makol, Marcus Wong, Claire Jiao and Katia Dmitrieva.
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