"Currency Wars" Begin!

A strong US dollar is sending Asian currencies to a full-blown storm.

Whether it is the yen, the Indian rupee, the South Korean won and other major Asian economic currencies, or the Indonesian rupiah, Vietnamese dong, Philippine peso and other small currencies of ASEAN countries, they have encountered a new round of selling pressure.

Some currencies have hit multi-month or even all-time lows.

In the face of the menacing wave of depreciation, central banks have acted urgently. On April 17, Japanese and South Korean officials simultaneously verbally intervened in the foreign exchange market, and Indonesia's central bank even stepped in outright by selling high-yield securities and buying the rupiah to curb the decline in its currency.

Goldman Sachs analyst Danny Suwanapruti noted in his latest report that the strength of the US dollar is dominating Asian currencies. According to a report released by the International Monetary Fund (IMF), if the dollar rises by 10%, the real gross domestic product (GDP) of emerging countries will fall by 1.9% in one year, and the negative impact on the economy will last for more than two years.

This is the Korean won and dollar banknotes taken in Seoul, South Korea, on September 22, 2022. Photo by Xinhua News Agency reporter Wang Yiliang

Dollar raid

Stimulated by Fed Chairman Jerome Powell's "hawkish" speech, the U.S. dollar index soared again on April 16, local time, once rising above 106.5, hitting a five-month high for three consecutive days.

Under the weight of the strong dollar, the currencies of Asian countries, including Japan and South Korea, are experiencing huge depreciation pressure. Among them, the USD/KRW briefly rose to a key integer level of 1400, hitting a new high since October 2022, and the USDJPY briefly touched 154.78, hitting a new high since 1990 for the fourth consecutive session.

At the same time, the currencies of Asian countries such as the Indian rupee, Indonesian rupiah, Vietnamese dong, and Philippine peso are also suffering from a new round of selling.

Among them, the Indonesian rupiah was one of the most slashed Asian currencies, falling more than 2% on April 16 to a four-year low, on April 16, the US dollar hit a record high of 25,295 against the Vietnamese dong during the day, on April 17, the Philippine peso fell below the key level of 57 pesos for the first time since the end of 2022, intensifying the pressure on the country's central bank to intervene in the money market, and the Indian rupee continued to decline, as of press time, the USD/INR exchange rate was at 83.587, which is at an all-time high.

It is rare for Japanese and South Korean officials to act together

As the dollar's appreciation put downward pressure on Asian currencies, South Korean and Japanese government officials made a rare concerted effort on Wednesday to verbally intervene in the currency market.

According to the Financial Associated Press, when the US dollar briefly touched the 1,400 mark against the South Korean won on Tuesday, the director of the International Finance Bureau of the Ministry of Finance of South Korea and the director of the International Department of the Bank of Korea jointly issued a statement saying that the foreign exchange authorities are paying close attention to the exchange rate trend, the supply and demand dynamics of the foreign exchange market, and other factors, and remain highly vigilant. "Excessive unilateral fluctuations in the foreign exchange market are not desirable for the Korean economy. ”

On Wednesday, Japanese and South Korean officials continued to verbally intervene in the foreign exchange market.

South Korea's finance minister, Choi Sang-moo, and Japanese finance minister, Shunichi Suzuki, jointly said after a meeting in Washington that they were "gravely concerned" about the recent sharp depreciation of the yen and the won, and that they were "prepared to take measures to prevent excessive volatility in currency markets."

Meanwhile, Bank of Korea Governor Rhey Chang-yong also said in an interview in Washington that the Bank of Korea is ready to take steps to reassure the market because the recent exchange rate volatility has been a bit excessive.

U.S. Treasury Secretary Janet Yellen, Japanese Finance Minister Shunichi Suzuki and South Korean Finance Minister Choi Sang-mu discussed exchange rates on Wednesday during the annual spring meetings of the International Monetary Fund (IMF) and the World Bank, according to a joint statement issued by the parties.

The three sides will "continue to consult closely on foreign exchange market developments, in line with our existing G20 commitments, while acknowledging the serious concerns of Japan and South Korea about the recent sharp depreciation of the yen and won," the statement said.

In addition, the collapse of the yen has made it impossible for Japanese business people to sit still.

Ken Kobayashi, president of the Japan Chamber of Commerce and Industry, said at a news conference on Wednesday that Japan's financial authorities should consider coordinating foreign exchange market interventions with other countries to support the yen.

Kobayashi noted that Japanese SMEs are suffering from rising costs of imported raw materials as the yen hits its lowest point against the dollar in nearly 34 years.

Some small and medium-sized enterprises that are unable to pass on the rising costs are simply unable to cope with the impact of the yen's depreciation. According to a survey conducted by the Japan Chamber of Commerce and Industry, since July 2022, there have been 20 consecutive months of failures due to the depreciation of the yen.

Kazuo Momma, a former Bank of Japan official who was in charge of monetary policy, also said on Wednesday that the Bank of Japan may be forced to react to a weaker yen.

Japan's household spending fell for the 12th straight month in February, as the depreciation of the yen led to higher import costs, which spurred cost-push inflation and weighed on consumption. "The depreciation of the yen is a problem for households and businesses," Momma noted. ”

The day before, Takeshi Niinami, president of Suntory Holdings Co., Ltd. and president of the Economic Association, pointed out that "the situation of the yen has reached a point where it needs to be corrected." ”

Tadashi Yanai, chairman and president of Fast Retailing, a Japanese retail holding company, also said earlier this month that a weaker yen "is not only bad for our company, but also bad for Japan." ”

Goldman Sachs analysts: central banks of different types of economies

Different coping strategies may be adopted

Goldman Sachs analyst Danny Suwanapruti noted in a recent report that the US dollar is dominating Asian currencies. Growth in Asia has picked up in recent months, inflation has slowed, and macro policy tightening should have further supported domestic currencies, but the dominant theme in macro markets is the Fed's policy path and its impact on US benchmark interest rates and the US dollar.

Goldman Sachs believes that the current expectation of a Fed rate cut is in stark contrast to the beginning of this year, opening up room for the dollar to rise further, when the dollar rises, the South Korean won, the Malaysian ringgit, the Indonesian rupiah is the most sensitive, if the dollar continues to rise, these currencies are most at risk of depreciation, and the Indian rupee is less sensitive.

Mitul Kotecha, head of Asia FX and emerging markets macro strategy at Barclays, said, "Most Asian currencies are having to succumb to the strength of the US dollar. Asian currencies were weakened by the broader strengthening of the US dollar in the currency market, driven by higher US Treasury yields and rising risk aversion in the market. ”

Goldman Sachs expects that the two central banks that are most active in defending currency weakness at a time of sharp currency depreciation are Indonesia and the Central Bank of the Philippines, as these two countries are economies with current account deficits, higher inflation rates and higher levels of external debt, and a sharp depreciation of their currencies could pose a greater risk to economic stability, while export-oriented economies with low inflation and current account surpluses (South Korea and Thailand) will be more tolerant of currency weakness.

The Bank of Thailand once again left its policy rate unchanged at its latest monetary policy meeting to support the exchange rate. In contrast to the verbal intervention of Japan, South Korea, and Thailand, Indonesia's central bank stepped in directly, selling high-yield securities and buying the rupiah to curb the decline of the local currency.

Goldman Sachs concluded that central banks in different types of economies may adopt different response strategies. Central banks in export-oriented economies may be more receptive to weaker currencies, while central banks in economies with higher levels of current account deficits, inflation, and external debt may be more proactive in taking measures to stabilize their currencies:

We believe that Bank Indonesia is even willing to raise interest rates further to maintain the stability of the rupiah, and the Bangko Sentral ng Pilipinas has already expressed its determination to curb currency depreciation through successive rate hikes in 2022.

Goldman Sachs expects that if the dollar rises further, then USD/KRW will move closer to the October 2022 high of 1441, and USD/THB will move closer to the September 2022 high of 38.37. It is worth noting that USD/INR and USD/MMR are already very close to their previous all-time highs, and further weakness is expected in the future.

Editor|He Xiaotao covers the source

Proofreading|Liu Siqi

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