Currency wars, let's go!

Suddenly set off a "currency defense war".

Under the "offensive" of a strong dollar, Asian currencies are facing a big storm. The currencies of Asian countries, including Japan and South Korea, have encountered tremendous 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. It is worth mentioning that during this window period of US dollar appreciation, the exchange rate of RMB against the US dollar remained relatively stable.

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.

#01

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 rupiah is one of the most slashed Asian currencies, falling more than 2% on April 16, falling 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 US dollar against the Indian rupee exchange rate was at 83.69, which is at a record high.

It is worth mentioning that during the window period of this wave of dollar appreciation, the exchange rate of RMB against the US dollar remained relatively stable, and the overall range remained in a narrow range in April this year, and it is now at 7.2548.

#02

A "currency war" broke out

In the face of the menacing wave of depreciation, central banks have acted urgently.

On April 17, Japanese and South Korean officials continued to verbally intervene in the foreign exchange market.

Japanese Finance Minister Shunichi Suzuki and South Korean Finance Minister Choi Sang-mu jointly said after meeting in Washington that they were "gravely concerned" about the recent sharp depreciation of the yen and South Korean won and were "prepared to take measures to prevent excessive volatility in currency markets."

When the U.S. dollar hit the 1,400 mark against the South Korean won, the director of the International Finance Bureau of the Ministry of Finance of the Republic of Korea and the director of the International Department of the Bank of Korea jointly issued a statement saying that the foreign exchange authorities are closely monitoring 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 April 17, Bank of Korea Governor Rhey Chang-yong said that the recent weakness of the won has been slightly overdone and that the Bank of Korea has the tools to act on exchange rate fluctuations. In an interview with the media, Rhee said that the central bank is ready to take stabilization measures and has sufficient resources to do so.

Affected by the shouting of South Korean regulators, the US dollar slipped against the South Korean won, falling 0.49% to 1382.63 as of press time.

Later on April 17, the financial leaders of South Korea, Japan and the United States will meet in Washington for the first trilateral meeting. Exchange rate stability is also expected to be one of the key topics of discussion.

At the same time, other central banks in Asia have also taken action.

Among them, the Bank of Thailand has also tried to push up the Thai baht through rhetorical intervention, and the Bank of Thailand recently said that it will continue to closely monitor the volatility of the foreign exchange market.

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. Bank Indonesia said it will intervene in the spot exchange market and the domestic non-deliverable forward foreign exchange (NDF) market, and maintain the stability of the rupiah in the market at all times.

In addition, some analysts pointed out that given that India's foreign exchange reserves are at an all-time high, the RBI may use this ammunition to curb any form of excessive volatility.

Goldman Sachs expects that the two central banks that are most active in defending the weakness of their currencies 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, high inflation rates and high levels of external debt, and a sharp depreciation of their currencies may 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.

Goldman Sachs believes that Bank Indonesia is even willing to raise interest rates further to maintain the stability of the rupiah.

#03

How big is the impact?

According to a report released by the International Monetary Fund (IMF), a stronger dollar will lead to capital outflows, higher import prices, and tighter financial conditions in these economies. A 10% increase in the U.S. dollar would mean a 1.9% decline in real gross domestic product (GDP) in emerging countries a year from now, with negative economic impacts lasting for more than two years.

Goldman Sachs analyst Danny Suwanapruti noted in his latest report that the strength of 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.

In fact, from the perspective of the objective environment, inflation in most Asian economies has fallen, creating conditions for central banks to cut interest rates, but under the pressure of currency depreciation, emerging market central banks do not dare to "act rashly".

Morgan Stanley pointed out that if the Asian central bank cuts interest rates one step ahead of the Fed, the currency will be under further depreciation pressure, which may put upward pressure on inflation, so it is expected that Asian central banks will wait for the Fed to start cutting interest rates in June (the baseline scenario of the US economic team) before starting to act.

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.