Recently, the local currencies of many countries such as the Japanese yen, South Korean won, Indian rupee, and Indonesian rupiah have fallen sharply against the US dollar, causing market concerns about the stability of the capital markets of emerging economies. What are the recent trends of these currencies and what are the negative impacts on the economies of the countries concerned?
Analysts say the main reason for the sharp depreciation of the relevant currencies is the so-called "strong dollar", that is, the Fed's policy has led to a sharp appreciation of the dollar, and capital has returned from emerging markets, exacerbating the risks faced by emerging economies and the world economy.
Pedestrians walk past an electronic screen displaying real-time exchange rates in Tokyo, Japan, on April 25. Photo by Xinhua News Agency reporter Zhang Xiaoyu
Multinational currencies are "in trouble"
The Bank of Japan decided on the 26th to keep the current monetary policy unchanged and did not implement quantitative tightening as expected. After the news was announced, the yen, which had been falling continuously, "dived" again, and the yen exchange rate against the dollar in the Tokyo foreign exchange market fell below 158 yen to 1 dollar, once again refreshing the lowest level since May 1990.
"The trend is shocking!," Akiki Omori, chief Japanese strategist at Mizuho Securities, said in an interview with the media, which means that the Japanese government will intervene in the market at any time. However, the analyst said, "now it's up to the dollar." The dollar is so strong that [Japanese] intervention will not work. ”
Just a few days ago, there were concerns about whether the yen would fall below the "dangerous mark" of 155 yen per dollar. Japanese Finance Minister Shunichi Suzuki said on the 23rd: "For excessive fluctuations, we will not rule out any options to deal with them properly." "As it turned out, the government's statements did not improve market sentiment.
The yen isn't the only currency that's been in trouble lately. At the end of last year, the won was less than 1,300 won to the dollar, and it has now fallen to nearly 1,380 won to the dollar. On April 16, it once fell below the 1,400 won mark in intraday trading. The U.S., Japan and South Korea finance ministers' meeting said the three countries "recognize the serious concerns of Japan and South Korea about the recent sharp depreciation of the yen and South Korean won" and will hold close consultations on foreign exchange market fluctuations.
At the same time, a number of other Asian currencies have shown similar trends. Asian currencies such as the Indian rupee, Indonesian rupiah, Malaysian ringgit, Vietnamese dong and Philippine peso have all continued to walk out of the downward curve. Bank Indonesia recently raised three main interest rates by 25 basis points to "strengthen the stability of the rupiah exchange rate". Analysts questioned the effectiveness of the measure, as Bank Indonesia's repeated intervention in the market failed to prevent the rupiah from depreciating by more than 5% from its level at the beginning of the year.
Pedestrians walk past an electronic screen displaying real-time exchange rates in Tokyo, Japan, on April 25. Photo by Xinhua News Agency reporter Zhang Xiaoyu
Sharp devaluation 'worrisome'
Currency is the target of investment in the capital market, and behind the depreciation is the flow of funds to the US dollar, which has a higher interest rate at the moment. Currency is the medium of exchange, and currency stability is essential for business, trade and people's livelihood. Especially in the context of globalization's interdependence among countries, the sharp depreciation of currencies in a short period of time has had a serious negative impact on countries.
In Japan, the sharp depreciation of the yen has brought severe imported inflation, and consumption has been under pressure against the backdrop of rising import costs. Hideo Kumano, chief economic analyst at Japan's Dai-ichi Life Economic Research Institute, said that such a depreciation will not be beneficial to export companies, but will lead to a resurgence in food prices, gasoline and other energy prices, which have been stabilized for a long time.
In South Korea, the depreciation of the won has led to higher inflation due to heavy dependence on imports for food and energy. South Korea's consumer price index (CPI) rose 3.1% year-on-year in March, beating market expectations and the Bank of Korea's target range. The pressure on the lives of the South Korean people has increased significantly. In addition, the depreciation of the won will trigger capital outflows and disrupt financial markets.
In countries such as Indonesia and Vietnam, the sharp depreciation of local currencies has made it more difficult to repay large external debts and interest due to high current-account deficits, inflation and high levels of external debt, posing greater risks to economic stability.
It is worth noting that the renminbi has shown strong resilience in the foreign exchange market. Zhu Hexin, deputy governor of the People's Bank of China and director of the State Administration of Foreign Exchange, said at a recent press conference held by the State Council Information Office that the renminbi has risen steadily against a basket of currencies and has performed steadily among global currencies. Cross-border capital flows were generally balanced, and foreign exchange reserves were generally stable.
On March 20, US Federal Reserve Chairman Jerome Powell attended a press conference in Washington. Photo by Xinhua News Agency reporter Liu Jie
Strong Dollar "Harvests the World"
When talking about the depreciation of many Asian currencies, the vast majority of analysts attribute the reason to the "strong dollar". The US Federal Reserve's keeping its benchmark interest rate high, coupled with ongoing geopolitical tensions in recent years, has led to global capital flows to the dollar.
From the perspective of short-term trends, on the 16th of this month, Fed Chairman Powell's statement was a direct cause of the sharp depreciation of many Asian currencies. Speaking at an event that day, Powell said the latest inflation data showed that it would take longer for the Fed to build up the confidence it needs to cut rates. In other words, he's suggesting that the Fed is in no hurry to cut interest rates.
As soon as the news came out, the market was in an uproar. Since last year, the market has widely believed that the Fed will cut interest rates this year. When the Fed's stance shifts, investor psychology changes. The dollar index, which measures the greenback against six major currencies, soared to new recent highs, directly leading to a "sell-off" in many Asian currencies.
The current round of yen depreciation actually began in early 2022. The Federal Reserve, which carried out an unprecedented "big release" during the new crown epidemic, made a "sharp turn" in 2022 and began to raise interest rates aggressively to combat inflation, bringing serious negative spillover effects to the world economy, and many non-US currencies have experienced multiple rounds of sharp depreciation.
As the current geopolitical tensions continue and inflation in the United States remains high, once the Fed continues to maintain the benchmark interest rate at the current high level for a long time, it may exacerbate the depreciation of other countries' currencies, so that funds continue to flow to the United States, leading to more turbulence in the global capital market.
Many analysts said that in recent years, the US monetary policy has been radical and changeable, and the fiscal policy has "eaten up the grain", taking advantage of the dominance of the US dollar to wantonly harvest global wealth and pass on the crisis, which has constantly triggered turmoil in the international market.
The Fed's large-scale interest rate cuts have not only pushed inflation soaring, but also exported capital and harvested global wealth by over-issuing US dollars to import goods and investing in other countries.
Desmond Rahman, an economist at the American Enterprise Institute, previously said that the Fed's policy has led to a sharp appreciation of the dollar, capital flows back from emerging markets, and higher interest rates have exacerbated the debt risks of emerging economies, making the world economy worse.
Source: Xinhua News Agency
Editor: Zeng Jiayi
Editor-in-charge: Liu Chengrui Review: Du Hongli Final review: Zou Yan