This year has seen a significant decline in emerging-market currencies, largely due to the strengthening of the US dollar. New Taiwan dollar (TWD) hit its lowest point in nearly eight years, while India's rupee reached a record low, and Malaysia's ringgit is nearing its weakest level since the Asian financial crisis in 1998. Among the 23 main developing-nation currencies monitored by Bloomberg, all but one have depreciated against the US dollar in 2024.
What Caused the Dollar Rally?
The primary factor driving the strength of the US dollar is its "exceptionalism." Despite moderate growth in much of the global economy, US economic indicators such as employment, retail sales, and inflation consistently outperform analysts' expectations. As a result, traders have reduced their expectations for Federal Reserve interest-rate cuts, contributing to the appreciation of the dollar. The Bloomberg Dollar Spot Index, which measures the dollar against 12 major currencies, has increased by over 4% this year as a result of these factors.
Why Are Emerging-Market Currencies Falling?
The surging dollar and the expectation of higher US interest rates for an extended period have been the primary driving forces. With the upper limit of the Fed's benchmark currently at 5.5%, investors can achieve attractive returns by holding dollars without exposing themselves to the exchange-rate risk associated with investing in emerging markets.
Although some developing nations offer higher interest rates compared to the US, this advantage has diminished significantly. For instance, at the beginning of 2023, Brazil's policy rate stood at 13.75%, Chile's at 11.25%, and Hungary's at 13%. However, since then, the central banks of these three economies have collectively reduced their key rates by more than 12 percentage points.
Bank of America holds a pessimistic outlook on several Asian currencies and is cautious, at best, about others, characterizing it as the beginning of a "chaotic era." The investment bank specifically identified the Chinese yuan, South Korean won, New Taiwan dollar, Thai baht, and Vietnamese dong as part of its bearish category.
In their "neutral" category, Bank of America includes currencies such as the Hong Kong dollar, Indonesian rupiah, Indian rupee, Malaysian ringgit, Philippine peso, and Singapore dollar.
Why Are Asian Currencies More Vulnerable?
Asian currencies have experienced significant declines this year, primarily because central bank interest rates in the region are lower compared to most other emerging markets. For instance, Malaysia's benchmark rate is 2.5 percentage points lower than that of the Federal Reserve, marking a record deficit for the country. Similarly, rates in Thailand, South Korea, China Taiwan, and China are also lower than those in the US.
While US policymakers have been increasing borrowing costs over the last couple of years, China's central bank has been implementing easing measures to support its struggling economy. This has resulted in constant pressure on the yuan, which has had a spillover effect on other Asian currencies, particularly those of South Korea and China Taiwan, due to their close economic ties with China.
What Are Central Banks Doing?
Anticipation of sustained high US interest rates has dissuaded Asian central banks from reducing their own benchmark rates due to concerns about potential currency depreciation. Policymakers in the region have implemented various measures to support their currencies. China has utilized its daily currency fixing to stabilize the yuan, while state-owned banks have intervened by selling dollars to boost the currency. Bank Indonesia has utilized its foreign exchange reserves to purchase rupiah, and Malaysia's central bank has encouraged state-linked firms to convert foreign investment income into ringgit.
However, central banks are aware of the delicate balance they must maintain. Rapid depletion of foreign reserves could raise concerns about their long-term financial stability. Even the Bank of Japan, with ample resources to defend the yen, intervened directly in the market only three times in 2022 to bolster its currency.
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