Asia has indeed fought a currency war. This phenomenon is mainly triggered by the strong US dollar, which has led to depreciation pressure on Asian currencies. For example, the exchange rate of the US dollar against the South Korean won and the US dollar against the Japanese yen both hit new highs. In response to this challenge, the region's central banks have taken a series of measures, including cutting foreign exchange reserves to hedge against the negative impact of a strong dollar, and policymakers taking action to seek exchange rate stability.
In action, South Korean and Japanese government officials have made a rare joint verbal intervention in the currency market in response to the depreciation pressure on Asian currencies from the appreciation of the dollar. However, despite the various measures taken by Asian countries, there is still uncertainty about whether these efforts will be sufficient for successful defense in the face of the continued strength of the US dollar. Some analysts believe that it will be difficult for Asian countries to win the "currency war" in the face of a stronger dollar. This suggests that while Asian countries are actively responding to the current currency challenges, the effect and final outcome remain to be seen.
What are the specific levels of reductions in foreign exchange reserves by Asian countries, and what are the implications for exchange rate stability?
The specific amount of foreign exchange reserve cuts in Asian countries includes Thailand's foreign exchange reserves falling to $221.4 billion, the lowest in the past two years, and Indonesia's foreign exchange reserves hovering around $135.7 billion, the lowest since November 2020. In addition, the RBI intervention has led to a reduction in its foreign exchange reserves by about $17 billion over the past two months.
The impact of these measures on exchange rate stability is complex. On the one hand, the decline in foreign exchange reserves poses a new challenge to Asian countries to stabilize their national currency exchange rates, especially in the face of a strong dollar and the Federal Reserve's continued sharp interest rate hikes. On the other hand, despite the decline in foreign exchange reserves, Asia's overall foreign exchange reserves remain above their October levels, providing Asian central banks with ample ammunition to deal with imported risks from exchange rate fluctuations and a strong rebound in the US dollar. However, with the rapid decline of reserves and the deterioration of fundamentals, more foreign funds (as well as domestic funds) may flee, increasing the risk of a debt crisis.
The specific amount of foreign exchange reserve cuts by Asian countries includes Thailand's $221.4 billion, Indonesia's $135.7 billion and India's decline of about $17 billion in the past two months. The impact of these measures on exchange rate stability is manifested in the form of increasing the difficulty and challenge of stabilizing the exchange rate, while also providing ammunition against exchange rate fluctuations, but also the risk of a debt crisis.
What are the details of the verbal intervention by South Korean and Japanese government officials in the currency market, including what specific steps they have taken?
Government officials in South Korea and Japan have taken verbal steps to intervene in the currency market in the face of depreciation pressure on Asian currencies from a stronger dollar. Specifically, the South Korean government has adopted a different strategy than Japan, entering the foreign exchange market on a regular basis to smooth out fluctuations, and the data shows that the South Korean government intervened in the market every quarter for 10 quarters to the end of last year. After the Japanese government fell to the 145 range against the dollar, the Bank of Japan and the Japanese government launched two measures in succession, including selling the dollar and buying the yen to support the yen, which was the first intervention in the foreign exchange market since June 1998.
In addition, in a rare concerted effort by South Korean and Japanese government officials, they verbally intervened in the currency market, expressing grave concern about the recent depreciation of their currencies and emphasizing their readiness to take action against excessive exchange rate volatility. The South Korean government and the Bank of Korea (central bank) are closely monitoring the recent increase in volatility in the Korean won exchange rate, while being alert to the associated risks, noting that the management will work to prevent a swarm in the market. The Ministry of Strategy and Finance and the Bank of Korea issued a statement saying that the foreign exchange authorities are paying close attention to exchange rate trends and supply and demand dynamics in the foreign exchange market with special vigilance, emphasizing that excessive unilateral fluctuations in the foreign exchange market are not desirable for the Korean economy.
South Korean and Japanese government officials have responded to the pressure of a stronger dollar and protected the value of their currencies through verbal interventions and specific market manipulation measures, such as regular entry into the foreign exchange market and selling dollars to buy local currencies.
How can small currencies in ASEAN countries (e.g. IDR, VND, Philippine peso) cope with the pressure of currency depreciation amid the strengthening of the US dollar?
Amid the strength of the US dollar, small currencies in ASEAN countries (e.g. IDR, VND, Philippine peso) are under pressure to depreciate their currencies. These countries have taken a variety of measures to address this challenge.
First, the central banks of some ASEAN countries intervened in the market to stabilize the exchange rate of their currencies. For example, Bank Indonesia intervened to stabilize the rupiah exchange rate so that it would not fall further against the US dollar. This kind of intervention is a common practice in ASEAN countries in response to currency depreciation pressures.
Second, ASEAN countries have mitigated the impact of a stronger dollar by strengthening risk warnings and formulating targeted response plans. With the arrival of the interest rate hike cycle, the US dollar has strengthened against non-US currencies, and the debt repayment pressure of ASEAN countries has increased, so many countries have strengthened risk warnings and considered formulating response plans from multiple dimensions such as epidemic control, economic recovery, and financial market fluctuations.
In addition, ASEAN countries are also exploring cooperation with other Southeast Asian countries to open direct trading platforms and develop foreign exchange trading centers, innovate foreign exchange derivatives markets, and provide adequate exchange rate risk management mechanisms. Such cooperation will help ASEAN countries better manage exchange rate risks and mitigate the impact of a stronger dollar on their smaller currencies.
Small currencies in ASEAN countries have responded to the pressure of currency depreciation caused by a stronger US dollar mainly through central bank market intervention, strengthening risk warnings and formulating response plans, and working with other countries to develop new financial instruments and markets. These measures are aimed at stabilizing the exchange rate of the national currency and mitigating the negative impact of a stronger dollar.
What are the reasons why it is difficult for Asian countries to win the "currency war"?
The main reasons why Asian countries are difficult to win in the "currency war" are as follows:
- Dollar Strength: The strength of the US dollar has put significant pressure on emerging markets in Asia. The Federal Reserve's interest rate hikes have pushed up the value of the dollar significantly, which has put downward pressure on the currencies of most countries in Asia. The dollar's aggressive rally has forced Asian officials to go on the offensive to stabilize the exchange rate, but these efforts have been particularly difficult in the face of a strong dollar.
- Capital Outflow Shocks: Emerging market central banks face daunting challenges in stabilizing their currencies and responding to capital outflow shocks. As long as the dollar remains strong, the pressure on emerging market central banks to respond will persist. Such capital outflows have not only weakened the foreign exchange reserves of Asian countries, but also increased the risk of currency depreciation.
- Attacks by international speculators: Historically, during the 1997 Asian financial crisis, international speculators such as hedge funds launched a series of sniping attacks on Asian countries and regions, resulting in the collapse of decades of accumulated foreign exchange in Thailand, Malaysia, Indonesia and other countries and regions. The attacks of these international speculators are often sudden and destructive, posing a huge challenge to the financial stability of Asian countries.
- Internal economic problems: In addition to external pressures, many Asian countries also have their own economic problems, such as fiscal deficits and high debt levels, which make them more vulnerable to external shocks. The imperfection of the internal economic structure and policies is also one of the important reasons why it is difficult for Asian countries to win the "currency defense war".
There are many reasons why Asian countries are difficult to win in the "currency war", including the strength of the US dollar, the shock of capital outflows, the attacks of international speculators, and the existence of internal economic problems. Together, these factors pose a serious challenge for Asian countries in the battle for currency.