The Bank of Thailand is scrambling due to a surge in the US dollar that has set the Baht and other Asian currencies on course for their worst quarter since the 1997 Asian financial crisis . The surge in the dollar has also created a dilemma for central banks.
The Bank of Thailand and other Asian central banks are already grappling with the fastest inflation in decades and now face stark choices: raise borrowing costs and risk damaging growth, intervene in foreign exchange markets with reserves that took years to build, or simply step back and let the market take its course.
Despite the ongoing recovery from the pandemic and the threat of a US recession, central banks face a difficult decision to tighten policy,” said Eugenia Victorino, head of Asia strategy at Skandinaviska Enskilda Banken AB in Singapore.
There is also a complicating factor in the strong US dollar, which exacerbates the effects of weak currencies on imported inflation.”
Most emerging Asian currencies including the Thai Baht fell on Wednesday, led by the South Korean won. There was a growing concern about a recession in the US, so investors sought safety in the dollar. Additionally, the Philippine peso, and Indian rupee, fell.
Asian central banks speculating on the US dollar
This quarter, the Bloomberg JPMorgan Asia Dollar Index is expected to fall by 4.4%, the steepest decline since 1997 when the Asian financial crisis hit. As Asian central banks seek to boost recovery from the pandemic, they have lagged behind their emerging-market peers in raising rates.
While the Federal Reserve raises rates, the Bank of Japan sticks to its ultra-easy monetary policy, resulting in a growing yield differential. The yen has lost 11% of its value against the dollar since the end of March, albeit for different reasons.
But Asia’s central banks may have to change tack as consumer prices steadily move up and weaker currencies add to concerns about imported inflation. Bangko Sentral ng Pilipinas has signalled at least one more rate increase in August after two quarter-point moves, while the Bank of Korea has kept the door open for a larger-than-usual hike in July.
“Inflation is proving to be persistent and central banks may have to move ahead of schedule and be even more aggressive than expected,” said Eddie Cheung, a senior emerging-markets strategist at Credit Agricole CIB in Hong Kong. “Growth is still holding up for the time being and that gives them leeway to focus on fighting inflation.”
Thai Baht Weakens
As the Fed embarked on aggressive rate hikes this quarter, Asian currencies weakened, with the Baht, South Korean won and Philippine peso losing more than 5% against the dollar.
In a report published Sunday, Morgan Stanley economists led by Deyi Tan warned currency depreciation could cause regional central banks to tighten if it adds to import-led inflation. Inflation expectations will continue to drive rate hikes, according to analysts.
As a result of the declines in their currencies, central banks have already drawn billions of dollars from their foreign exchange reserves. In Thailand and Indonesia, stockpiles have fallen to their lowest levels since 2020 as officials pledge to curb currency volatility while delaying interest rate hikes.
Traders are pricing a 75-basis-point hike in July, which may be the most damaging for Asian currencies. Despite deteriorating external finances and the Fed tightening, Goldman Sachs Group Inc has warned that high-yielding currencies such as the Indian rupee and Indonesian rupiah may fall.
Miguel Chanco, Pantheon Macroeconomics Ltd.’s chief emerging Asia economist, wrote in a report Monday that despite currencies tanking, central banks are unlikely to match the Fed’s rate hikes like-for-like.
It is likely that reserves will be used to lean against excessive currency volatility in the future.”