(Bloomberg) — Central banks across Asia face a difficult decision after the Federal Reserve’s hawkish cut — stage a costly fight back against dollar strength, or stand by and watch their currencies falter.
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The Federal Reserve’s signal that inflation concerns are back on the agenda led to a sharp selloff in Asian currencies on Thursday. The Indian rupee hit a fresh record low against the greenback, while the Korean won fell to its weakest level since the financial crisis. The Bloomberg Asia Dollar Index was around 0.4% lower. China’s central bank sought to support the yuan Thursday through its reference rate.
The moves will reignite questions about how far central banks across Asia are willing to go to defend their currencies — and how much impact their moves will have. An index shows currencies in the region have lost almost 4% against the dollar this year even as the Fed cut rates.
“It is hard to fight the higher dollar move against Asian currencies when it is primarily dollar driven, which means regional central banks would have to play defence and try to smooth out depreciation pressure to try to keep an orderly FX market,” said Wee Khoon Chong, a strategist at BNY Mellon in Hong Kong.
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Asia’s central banks are taking different approaches to dollar strength. Bank Indonesia has been been vocal about its recent interventions in the domestic market, sending a clear signal to traders. The Reserve Bank of India has used a mix of offshore and onshore contracts to bolster the rupee, but hasn’t made public statements about its recent moves. Other central banks have said they are closely watching the market.
PBOC Offers Support
The People’s Bank of China ramped up its support for the yuan on Thursday by setting a daily reference rate that was significantly stronger than the average in a Bloomberg survey. The so-called fixing, which limits moves in the onshore yuan by 2% on either side, is at its strongest level relative to the forecast since July.
“The PBOC will continue to restrain the upside pressures on dollar-yuan for now, but I think the exchange rate will break to new highs in 2025 on the outbreak of a second US-China trade war,” said Alvin T. Tan, head of Asia FX strategy at RBC Capital Markets.
Chinese state banks sold the dollar in the onshore market at the open and hardly offered to buy the greenback, according to traders. The traders asked not to be identified as they are not allowed to comment on the foreign-exchange market.