US dollar’s recent surge has prompted Asian currencies to drop

The US dollar’s recent surge is causing Asian currencies to drop to their lowest levels in months, which has prompted Japan and China to take measures to protect their exchange rates.

On Wednesday, Japan issued a strong warning about the yen’s rapid decline, and their top currency official stated that they are prepared to intervene if speculative trading continues. Around the same time, China’s central bank provided unprecedented guidance by adjusting its daily reference rate for the yuan as it approached a level not seen since 2007.

US dollar is surging while Asian currencies perform poorly

Positive economic data in the US has led some traders to believe that the Federal Reserve will maintain higher interest rates for an extended period. That has caused the dollar to strengthen and pushed an index measuring Asian currencies toward its lowest point since November. Consequently, policymakers in the region, who had been depleting their reserves last year to support their local currencies, are once again preparing to counter bearish speculators.

Vijay Kannan, a macro strategist at Societe Generale in Singapore, cautioned that the expectation of prolonged higher US rates is increasing pressure, making investors more cautious. Specifically, Emerging Asia is more susceptible to this strong dollar, given the significant gap in interest rates and greater exposure to a weaker Chinese growth outlook.

Rising oil prices have also reignited concerns about higher inflation, undermining the belief that Asian central banks had finished raising interest rates, thereby reducing the attractiveness of local currency bonds. China’s bleak economic outlook, plagued by disappointing data for several months, dampens sentiment surrounding emerging-market currencies.

Both the yen and yuan have performed poorly among Asian currencies this year. While Japan has refrained from employing more aggressive measures to support its currency, China has already boosted the yuan, including instructing state-owned banks to sell dollars and tightening offshore liquidity to squeeze short currency positions.

Similar currency defense measures are in place in other parts of Asia. In Taiwan, foreign exchange reserves declined in August for the first time in nearly a year due to intervention by the monetary authority. Meanwhile, in Thailand, the central bank has warned that rapid baht movements will trigger intervention.

Nevertheless, there is ongoing skepticism about whether these measures can make a significant impact, especially without a less aggressive stance from the Federal Reserve or a notable improvement in China’s economic performance. Alvin T. Tan, who serves as the head of emerging-market currency strategy at RBC Capital Markets in Singapore, pointed out that the immediate consequence of the surging US dollar is that it will deter most Asian central banks from implementing looser monetary policies, as they are concerned about exacerbating the weakness of their currencies.

Euro slides as the US dollar dominates

The Euro is currently hovering near its four-month low. This drop is attributed to the US dollar gaining strength, driven by a significant surge in Treasury yields. This week, the United States saw a substantial $36 billion corporate issuance, which pushed up yields throughout the Treasury curve. The benchmark 10-year bond in the US edged up to 4.27% during the US session and has remained near that level as we head into Wednesday’s trading day, compared to 4.06% just last Friday.

The Japanese yen regained some ground today following comments made by Masato Kanda, Japan’s Vice Minister of Finance for International Affairs. In response to speculative moves in foreign exchange, he stated that if they continue, the government will deal with them appropriately. Shortly after his statement, BoJ board member Hajime Takata also spoke on Wednesday, although his remarks had little impact on monetary policy. However, he reaffirmed that the central bank would exercise patience when considering any adjustments to its monetary policy.

Despite slightly better-than-expected GDP data in Australia, the Aussie dollar has shown sluggish performance in the last 24 hours. The second-quarter GDP came in at 0.4% quarter-on-quarter, in line with predictions. However, the annual figure up to the end of June stood at 2.1%, surpassing the expected 1.8%, which reveals an upward adjustment to previous data releases.

Meanwhile, crude oil prices have surged to new highs following Saudi Arabia and Russia’s commitment to maintaining production cuts through the end of the year. The WTI futures contract is now above $86.60 per barrel, while the Brent contract hovers around $90 per barrel. Meanwhile, spot gold remains steady, just below $1,930 at the time of writing.

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