(Bloomberg) -- A renewed advance in the dollar is sending Asian currencies to multi-month lows while prompting authorities in China and Japan to step up defense of their beleaguered exchange rates.
Japan issued its strongest warning in weeks against rapid declines in the yen on Wednesday, with its top currency official saying the nation is ready to take action amid speculative moves in the market. Shortly after, China’s central bank offered the most forceful guidance on record with its daily reference rate for the yuan, as the managed currency weakened toward a level unseen since 2007.
Resilient US economic data has persuaded at least some traders that the Federal Reserve will keep interest rates higher for longer, sending the dollar jumping and a gauge of Asian currencies toward the lowest since November. That means policymakers in the region, who spent last year burning through their reserves to support local currencies, are heading back to the battlefield to take on bearish speculators.
Elevated oil prices have also reignited fears over higher inflation, a move that’s undermining expectations Asian central banks were done hiking interest rates and hurting the appeal of local-currency bonds. China’s dire economic outlook, which was built on data have been disappointing for months, is also weighing on sentiment in emerging-market currencies.
“Rates stay high for longer and relative US growth resilience are factors that continue to underpin support for the dollar,” said Christopher Wong, a currency strategist at Overseas Chinese Banking Corp in Singapore. “So overall, with the dollar being a dominant trend, yuan softness persisting and oil prices going higher, some Asian FX that could face relative weakness include the yen, Thai baht, Singapore dollar.”
The yen and yuan are among the worst performers among Asian currencies this year. While Japan has stopped short of using more aggressive tools to support its currency, China already sought to bolster the yuan by asking state-owned banks to sell dollars while tightening liquidity offshore to squeeze short currency bets.
Similar currency defense measures exist elsewhere in Asia. Taiwan’s foreign exchange reserves declined 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 moves in the baht will prompt intervention.
Still, skepticism remains whether these measures are game changers in the absence of a less hawkish Fed or a pickup in China’s economy. Morgan Stanley turned bearish on emerging market currencies this week, saying those in Asia will be exposed to a China growth slowdown.
--With assistance from Ruth Carson and Karl Lester M. Yap.
(Updates throughout)
©2023 Bloomberg L.P.
