Asian currency sell-off unlikely to end soon

Asian currencies extended their losses against the US dollar in September, as the Federal Reserve (Fed, the US central bank) signalled a more hawkish approach to monetary policy to curb inflation. Further depreciation among Asian currencies looks inevitable in anticipation of a strong US dollar, which has risen by 17.8% so far this year (measured by the US dollar index).

Why does it matter?

EIU expects further tightening by the Fed in November and December, although the risk is rising that rate increases will occur at a faster pace than we currently anticipate. This outcome, in stark contrast to the prospect of sustained monetary easing in Japan and China (along with fragility in other major economies), will push the US dollar even higher. A stabilisation or reversal of the trend is therefore predicated on the slowing pace of Fed tightening. Consequently, we expect that the pressure facing Asian currencies will last for another quarter, if not longer. 

Current-account dynamics are another major driver of performance. The currencies of traditional surplus economies—including South Korea, Taiwan and Japan—have suffered the strongest depreciatory pressures this year, while China’s renminbi has declined by 10% against the dollar. This reflects the disproportionate impact of a dimming global demand outlook and elevated energy prices on the region’s exporters; some have been gripped by rare current-account deficits in recent months. The recent downgrades to our global growth outlook, which assume a deeper slowdown than previously expected, point to continued underperformance by the “exporter currencies” in 2023.

Despite the likelihood of persistent capital outflows in the months ahead, we do not expect currency volatility to stoke a regionwide financial crisis. Major Asian economies have manageable external financing requirements. Although recent developments have sparked memories of the Asian financial crisis of 1997-98, most countries in the region have since built up larger reserves of foreign exchange. Importantly, the switch to more flexible currency schemes in many economies means that authorities no longer have to defend exchange rates at the cost of depleting their reserves. Vulnerabilities are largely confined to the region’s smallest and weakest economies, with limited spillover effects.

What next?

With reserves declining but still at robust levels, most countries in Asia will continue to intervene intermittently in the foreign-exchange market to slow the slide of their currencies. These efforts will help to temper volatility in the markets, but are unlikely to stem depreciation in the months ahead as long as the US dollar rally persists. Monetary tightening is another option; we now expect monetary authorities in countries including India, Indonesia and Malaysia to raise rates more aggressively to catch up with the Fed. This will have a dampening effect on their growth.

The analysis and forecasts featured in this piece can be found in EIU Viewpoint, our new country analysis solution. EIU Viewpoint provides unmatched global insights covering the political and economic outlook for nearly 200 countries, helping organisations identify prospective opportunities and potential risks.