Costa Rica and Thailand joined a growing chorus of developing nations expressing alarm at the appreciation of their currencies as increased monetary easing in the U.S. and Japan spurs demand for higher-yielding assets.
Costa Rica plans to reduce interest rates to discourage capital inflows after the colon reached the strongest in almost five years. Thailand’s baht retreated from a 17-month high today after Finance Minister Kittiratt Na-Ranong said the exchange rate is “not at a good level” and exporters will face difficulties should it strengthen further. Currencies in Colombia, Poland and Romania reached their strongest levels this month since at least February 2012.
The Federal Reserve expanded its monthly asset purchases beginning Jan. 1, boosting the supply of U.S. currency, and Japanese Prime Minister Shinzo Abe is seeking “bold” monetary easing to end deflation. Russia’s central bank warned yesterday the world is on the brink of a fresh “currency war,” while policy makers in South Korea and the Philippines said this week they may restrict capital inflows. Colombia’s finance chief called on his central bank to step up dollar purchases and the Czech Republic threatened intervention to weaken the koruna.
“With risk appetite among investors growing this year and plenty of liquidity supplied by developed nations, appreciation pressure on the emerging-market currencies is unavoidable,” said Koji Fukaya, a former chief foreign-exchange strategist at Credit Suisse Group AG in Tokyo who now runs his own research firm, Office Fukaya. “Monetary authorities are probably not trying to guide weaker currencies, but the problem for them is the pace of their appreciation.”
The Asia Dollar Index, which tracks Asia’s 10 most-used currencies excluding the yen, has risen 0.5 percent this year and the Bloomberg-JPMorgan Latin America Currency Index is up 0.9 percent. Romania’s leu climbed 4 percent, Mexico’s peso 2.1 percent and the baht 2.7 percent, leading gains among 25 emerging-market currencies tracked by Bloomberg.
The colon is up 2.2 percent this year. It was little changed today at 497.29 per dollar as of 12:01 p.m. in New York. Costa Rica will lower interest rates as part of a series of measures to stem the currency’s gains, Finance Minister Edgar Ayala told reporters in San Jose. The interest rate on cash deposits at banks will be lowered to 8.5 percent from 9.2 percent at the start of the year.
President Laura Chinchilla said Jan. 15 that “speculative capital inflows are real and massive weapons of mass destruction” against the Central American economy. The central bank has bought more than $150 million this year to stem gains.
Pacific Investment Management Co.’s Bill Gross, the manager of the world’s biggest bond fund, said yesterday that Mexico’s peso and Brazil’s real are better buys for investors than high-yield debt.
“Mexican Peso ‘yields’ 4.5%; Brazilian Real ‘yields’ 7.25%,” Gross said in comments posted on Pimco’s Twitter account. “Better use of cash than high yield bonds.”
Romanian central bank Deputy Governor Cristian Popa said yesterday the currency is “not distant from fair value,” while Russia’s central bank has already intervened this year to stem gains in the ruble. Colombia’s peso strengthened 1.7 percent in the past month and Finance Minister Mauricio Cardenas said Jan. 15 he saw no reason for such gains and would like the central bank to boost dollar purchases after it bought a record $4.8 billion in 2012.
The yen weakened 1.3 percent today as Japanese Economy Minister Akira Amari said the yen is still in the process of correcting from excessive gains. The currency touched 89.67 on Jan. 14, the weakest level since June 2010.
The baht gained 0.1 percent from yesterday at 29.79 per dollar, having risen as much as 0.3 percent before Kittiratt’s comments. Bank of Thailand Governor Prasarn Trairatvorakul said today that capital inflows into short-term securities were driving the currency higher, adding that the central bank is “closely watching” the situation and has measures to deal with the issue if needed.
Taiwan’s central bank has intervened to weaken its dollar on most days in the past nine months, according to traders who asked not to be identified.
“There is normally a degree of intervention in the case of Asian central banks,” said Sacha Tihanyi, senior currency strategist at Scotiabank in Hong Kong. “There is currently a desire to not interfere too much with fundamental forces, though speculative forces will be more of a concern.”
South Korea’s won and the Philippine peso led Asian gains in 2012, prompting policy makers in the two nations to clamp down on the use of currency forwards in the fourth quarter. The currencies advanced 8.3 percent and 6.9 percent, respectively, before appreciating further this month.
South Korea’s Vice Finance Minister Shin Je Yoon said yesterday the nation is studying measures to reduce volatility in capital flows and called for next month’s meeting of finance ministers from the Group of 20 nations in Moscow to focus on the adverse effects of monetary easing in the U.S., Europe and Japan.
The Philippine peso has gained 0.9 percent this year and reached 40.55 per dollar on Jan. 14, its strongest level since March 2008. Central bank Governor Amando Tetangco said the following day that the monetary authority intervened to restrain the currency and is focused on limiting speculative inflows that could lead to asset-price bubbles.
The won is forecast to gain 3.3 percent this year versus the dollar and the Philippine peso 3.9 percent, based on the median estimates among analysts surveyed by Bloomberg.
“Korea and the Philippines are the Asian front of the coming currency war,” Tim Condon, the Singapore-based head of Asian research at ING Groep NV, wrote in a report today. “It’s going to get bloody. We consider policy interest rates in both countries, 2.75 percent in Korea and 3.5 percent in the Philippines, too high given the consensus view that their currencies are a one-way bet.”
Those benchmark interest rates compare with a maximum 0.25 percent in the U.S., 0.1 percent in Japan and 0.75 percent in the euro area. South Korea’s two-year bond yield of 2.73 percent compares with 0.25 percent on Treasuries and 0.07 percent on Japanese notes. Similar-maturity debt yields 6.1 percent in Russia and 5.62 percent in Chile, according to data compiled by Bloomberg.
Chilean Finance Minister Felipe Larrain said on Jan. 8 the government shared exporters’ concern about the appreciation of the nation’s peso, which strengthened 8.4 percent versus the dollar in 2012 and has gained a further 1.2 percent this year.
Chile´s government is carefully monitoring the peso´s appreciation and is helping to contain the exchange rate through an austere fiscal policy, President Sebastian Pinera told reporters in Santiago today. The central bank is autonomous and can intervene in the currency market if it wants, he said.
Hungary’s forint strengthened 0.8 percent against the euro today, trimming its decline in the past month to 1.6 percent. The country’s minister in charge of aid talks with the International Monetary Fund, Mihaly Varga, said the currency should be stabilized in a stronger range, Budapest-based HirTV reported.