Strong Dollar May Divide Opinion at Asia's Central Banks

A Deep Dive Into Global Currencies

The dollar’s surge is pushing Asian central banks into different camps: from those finding relief in a weaker currency to those watching the sharp declines with some trepidation.

After struggling to engineer weaker currencies to help spur exports and inflation, central banks in many of Asia Pacific’s developed economies -- including Japan and Australia -- are finding the Federal Reserve doing the job for them. For emerging markets like Malaysia and Indonesia, the rapid slide in currencies exposes economic imbalances, including rising debt, and triggers risks from surging prices to a rundown of reserves.

Donald Trump’s victory in the U.S. presidential election has spurred speculation his economic policies will lead to a pick-up in inflation and a faster pace of rate increases. Futures traders now price in a 100 percent chance of a rate hike in December, compared with 68 percent at the beginning of this month. That means the pressure on Asia’s central banks is unlikely to go away anytime soon.

Krystal Tan, an economist with Capital Economics Ltd. in Singapore, said Asian central banks can be roughly divided in two camps when it comes to a stronger dollar, with the larger group being clearly in favor of weaker currencies to support exports.

“Countries with low foreign debt, they would be happier about a weaker currency,” she said by phone. For many Asian central banks, “they don’t want destabilizing forex markets, but they want the extra edge if they can have it,” she said.

While central bankers usually keep their cards close to their chests, recent signals and the best guesses of economists who divine them suggest there’s three broad views of the greenback’s strength.

The Fans: 

  • The Reserve Bank of New Zealand has long been wary of excessive currency strength, which has been driving deflationary pressures. Earlier this month, Assistant Governor John McDermott said the central bank is “worried” about the impact of the strong local dollar and will cut interest rates again if needed. Inflation has languished below the bottom of the central bank’s 1 percent to 3 percent target band for two years.
  • While Australia’s currency has fallen 25 percent in the past three years, its recent resurgence has been something of an irritation to the Reserve Bank of Australia. As the central bank tries to steer an economic transition away from a reliance on mining and toward services exports, a falling Aussie has helped it out. But for the past six months, the RBA has repeatedly said in rate-decision statements that the appreciating currency could “complicate” things.
  • Few can match the Bank of Japan for the impact it’s had on bringing down the currency. The BOJ’s massive asset-purchase program -- aimed ostensibly at stoking inflation, has weakened the yen, cushioned Japanese exporters and given a boost to the stock market. “Japan is the only central bank that is clearly happy with the stronger dollar, because it essentially means the U.S. Fed is doing their work for them,” said Mary Nicola, a strategist with Aviva Investors Asia Ltd. in Singapore. “They have been waiting for this for a long time.”
  • For South Korea, a stronger currency has hurt car and electronic exporters and a weaker won brings some relief. But the benefit isn’t as clear-cut, since currencies of export rivals such as Japan and China have also depreciated, said Toru Nishihama, an emerging-market economist at Dai-ichi Life Research Institute Inc. in Tokyo. “They will probably step in the market to smooth the volatility, but they may want the won to weaken on the nominal effective exchange-rate basis for their export competitiveness,” he said. The outlook is also complicated by rising political risks after South Korean President Park Geun-hye said Tuesday she’s willing to resign.
  • Thailand is seen favoring a weaker baht to support its export industries and can afford some moderation, given its substantial reserve buffers. Central bank and government officials have expressed concern about the currency’s strength and despite the recent slide, the baht is still up 1.1 percent against the dollar this year. “Thailand can afford some currency weakness from here as the weighting of exports in the nation’s economy is quite high,” Dai-ichi’s Nishihama said. “With domestic consumption and the economy remaining sluggish, inflation is not really a threat either.”

The Foes:

  • In Malaysia, a rapid depreciation in the ringgit may be an unwelcome development for the government and a source of concern for the central bank ahead of a possible general election next year, said Julian Wee, a Singapore-based senior market strategist at National Australia Bank Ltd. “Growth is flagging and there might be some concern if you have the ringgit weakening sharply, there might be government pressure to stop that,” he said. “It’s not just the symbol, it’s also the fact that a weaker ringgit may translate into higher inflation.” The central bank has already clamped down on offshore trading of its currency to help slow the ringgit’s decline. And while other Southeast Asian nations took advantage of low U.S. interest rates to build reserves, Malaysia’s buffers are little changed from a decade ago, putting it in a more vulnerable position.

  • In Indonesia, the central bank may be more worried about currency weakness than in Thailand, but not as much as in Malaysia, said Nishihama. While policy makers have taken aggressive action this year to spur the economy, cutting interest rates six times, sharp moves in the currency may “revive inflationary concerns,” he said. The central bank said last week it continues to seek to deepen the currency market to reduce volatility and the rupiah at its current level is undervalued
  • The Reserve Bank of India has been a vocal critic of what it calls ‘beggar thy neighbor’ policies, where central banks steal trade gains from other countries by keeping their currencies artificially weak. In an environment where other Asian currencies are weakening, the stronger dollar may not worry the RBI too much. But it will be alarmed by a pick-up in inflation, according to Trinh Nguyen, an economist at Natixis SA in Hong Kong. A steep drop in the rupee -- which hit a record low last week -- risks increasing the oil importer’s bill and is an issue policy makers will grapple with at next week’s interest-rate meeting

The Elephant in the Room:

  • While a weaker Chinese yuan may help to boost exports, a rapid depreciation risks spurring capital outflows. Authorities are seeking to bolster the yuan after it fell to an eight-year low against the dollar last week. People’s Bank of China Deputy Governor Yi Gang said on Sunday the country has "very adequate" foreign reserves and the yuan remains strong compared with the currencies the central bank uses to set the exchange rate. Capital will flow back to the country as the economy recovers and the business environment improves, he said.

— With assistance by Chris Anstey, Brett Miller, Jeff Kearns, Chris Bourke, and Jeanette Rodrigues

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