By Nimesh Vora and Ankur Banerjee
MUMBAI/SINGAPORE (Reuters) – Central banks from Brazil to Indonesia scrambled to defend their struggling currencies on Thursday, hours after the Federal Reserve jolted markets by indicating it may not cut rates by much next year.
The Fed’s tacit acknowledgement of the inflationary risks likely to come from incoming president Donald Trump’s immigration and trade policies unnerved investors.
U.S. Treasury yields rose, sending the dollar to its highest in two years against six major rivals.
The South Korean won dropped to its lowest level in 15 years, the Indian rupee to a record low and the Indonesian rupiah to a four-month low. MSCI’s index of emerging markets currencies also hit a four-month low.
Higher U.S. rates could lead to a return of last year’s currency and capital flows problems that emerging markets were barely recovering from. The dollar’s yield advantage could drive capital out of their markets while weakening their currencies, potentially spawning inflationary pressures and market volatility.
On Thursday, central bankers from South Korea to India to Indonesia were quick to take action, defending their currencies by selling dollars along with strong verbal warnings.
India’s central bank sold dollars to support the rupee as it plumbed an all-time low, weakening past the 85 to the dollar psychological level.
“The pace of the selling in US Treasuries has been a massive green light for FX traders to re-engage with dollar longs, and they have done so liberally, with emerging market FX being carved up,” said Chris Weston, head of research at Australian online broker Pepperstone.
HSBC’s chief Asia economist Fred Neumann said a more hawkish Fed “ties the hands of emerging market central bankers”.
“While in the short-term, FX intervention by EM central banks in Asia can help soften the impact from the Fed’s hawkish tilt, over time local monetary policy will require adjustment as well,” he said.
The Brazilian real sank overnight to a lifetime low, prompting the central bank to sell dollars via a spot auction, while central banks in Indonesia and Thailand said they would act to prevent excessive volatility.
Indonesia’s central bank voted on Wednesday against a rate cut which would have helped the economy, focusing instead on currency stability, a development analysts said underscores the challenge many other central banks will face.
South Korea’s won, the worst performing Asian currency this year with a 12% decline, touched a 15-year low, with authorities suspected of defending the 1,450 per dollar level. Onshore won trading closed at 1,451.9 per dollar.