- Asian central banks are cleaning out their coffers to shore up their currencies as a soaring dollar erodes the purchasing power of their currencies.
- Commodity-exporting Asian countries are likely to perform better than non-commodity exporting ones especially as Asian central banks are better capitalized today to withstand the onslaught of a roaring greenback, compared with in 1997.
Central banks in Asia have been saving for a rainy day for decades and now that day has come.
In the aftermath of the 1997 Asian Financial Crisis, reforms and risk management saw Asian central banks beef up dollar reserves and other reserve assets, to respond appropriately should their currencies come under pressure once again.
Now as the U.S. Federal Reserve embarks on its most aggressive series of interest rate hikes in decades, years of accumulating foreign-exchange reserves has enabled central banks in Asia to ante up and shore up their rapidly weakening currencies against a strengthening dollar.
But that’s not to say that Asian central banks aren’t taking body blows.
As of June 17, Thailand’s reserves have fallen to US$221.4 billion, their lowest level in over two years, while Indonesia’s reserves are sitting at their lowest level since November 2020.
Meanwhile, South Korean and Indian reserves have fallen to their lowest in over a year.
While Asian central banks recognize that fighting the Fed is an exercise in futility, at the very minimum central bankers have helped to stabilize their domestic currencies, to prevent a repeat of 1997.
According to strategists at Goldman, high-yielding emerging Asian currencies may not expect to see any respite soon as they are likely to be continuously pressured by declining external finances and the ongoing risk-off sentiment sparked by the Fed’s tightening policies.
With another large Fed rate hike due later next month, Asian central bankers are bracing themselves for another bout of currency volatility at the worst possible time with high inflation and commodity prices roiling their already pandemic-ravaged economies.
Against this backdrop, investors can expect to see some opportunists bet against emerging market currencies.
Whereas bets against the Bank of Japan have thus far tested, but not broken its resolve, given that Japan is the world’s second largest holder of U.S. Treasuries, the same can’t be said for other Asian countries.
At some point, bets against the Bank of Japan may lose steam and other emerging market currencies, particularly non-commodity exporting nations, could draw a new bout of predatory currency attacks.