Emerging Markets Struggle With Weak Currencies as the Dollar Crunches Their Peers

Currency intervention has emerged as a critical battleground, particularly in emerging markets across Asia, as a recent surge in the US dollar exerts pressure on officials to take action.

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In countries like South Korea, Thailand, and Poland, policymakers have signaled their vigilance regarding currency volatility, with some explicitly stating their readiness to intervene if necessary. Indonesia has gone a step further by actively selling dollars, while China has consistently resisted yuan depreciation, signaling its commitment to currency stability.

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The faster-than-expected rise in US inflation data has diminished expectations for Federal Reserve interest-rate cuts, prolonging the struggle against dollar strength. Additionally, escalating tensions in the Middle East between Israel and Iran pose the risk of further bolstering demand for the dollar as a safe haven.

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Marcella Chow, a global market strategist at JPMorgan Asset Management in Hong Kong, highlighted the prevalence of verbal intervention from central banks in response to the Fed's reluctance to ease policy. With expectations of continued weakening in Asian currencies amid the Fed's stance, she emphasized the potential necessity for further verbal intervention.

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This surge in central bank activity represents yet another front in the conflict stemming from the Fed's shift towards higher interest rates. Traders have adjusted their expectations of US rate cuts accordingly, given the persistently high consumer price data, leaving emerging-market policymakers with significant challenges ahead.

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In Thailand, policymakers are employing rhetoric to support the baht, despite its 6% decline this year. Similarly, Poland's central bank has expressed willingness to intervene to strengthen the zloty, while Bank of Korea officials are closely monitoring the won's performance.

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Bank Indonesia has actively intervened by purchasing the rupiah to limit its depreciation, with Governor Perry Warjiyo emphasizing intervention and the sale of high-yielding securities as primary measures to support the currency. Peru's central bank has also been selling dollars to stabilize the sol amidst economic uncertainties.

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Despite challenges not solely related to dollar strength, Israel's central bank has intervened by selling US currency following recent geopolitical tensions.

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In Asia, where many of the most interventionist central banks are located, maintaining vigilance is imperative, according to Paul Mackel, global head of foreign-exchange research at HSBC Holdings Plc in London. Weak currencies can exacerbate inflationary pressures, posing additional challenges for these economies.

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China faces a dilemma over the yuan, balancing the need for exchange-rate stability with the risk of capital outflows. While the central bank has prioritized propping up the yuan, further tools may be required to prevent excessive depreciation.

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While the dollar rally shows no immediate signs of abating, some analysts suggest that now may be an opportune moment to consider investing in currencies that have experienced significant declines, particularly in Asia. David Chao, a strategist at Invesco Asset Management in Singapore, sees this as a potential buying opportunity for regional risk assets.

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