A man looks at an exchange window showing exchange rates of various currencies against the Japanese yen, along a street in central Tokyo on April 29, 2024.
Richard A. Brooks | Afp | Getty Images
Central banks in Asia face catch 22 in 2025.
The US dollar’s relentless rally has sent Asian currencies such as the Japanese yen, South Korean won, Chinese yuan and Indian rupee falling to multi-year lows against the greenback.
While a cheaper currency could in principle make exports more competitive at a time when President-elect Donald Trump is threatening to impose tariffs, central banks in Asia should assess its impact on imported inflation and prevent speculative bets on continued weakness in their currencies that could complicate policymaking. analysts said.
The US dollar has risen sharply since Trump won the 2024 presidential election, up about 5.39% since the November 5 US election.
Part of the reason for the strengthening of the US dollar is that Trump’s campaign promises, including tariffs and tax cuts, have been seen economists be inflationary.
Federal officials at a December meeting expressed concern about inflation and the impact President-elect Donald Trump’s policies could have, indicating they will be slower to cut interest rates because of the uncertainty, minutes released Wednesday showed.
A reassessment of the outlook for the Fed’s monetary policy widened the yield gap between US and several Asian bonds.
This interest rate differential has reduced the appeal of lower-yielding assets, sent major Asian currencies falling and prompted some central banks, including the Bank of Japan and the Reserve Bank of India, to intervene.
James Ooi, market strategist at online broker Tiger Brokers, told CNBC that a strong US dollar will make it harder for Asian central banks to manage their economies.
A stronger US dollar is likely to “pose challenges for Asian central banks by increasing inflationary pressures through higher import costs and weighing on their [central banks’] foreign reserves if they try to support their currencies through interventions,” Ooi told CNBC via email.
“If a country is struggling with high inflation and currency depreciation, lowering interest rates to stimulate economic growth may be counterproductive,” Ooi added.
China’s onshore yuan hit a 16-month low of 7.3361 on Jan. 7, under pressure from rising U.S. government bond yields and a strengthening dollar.
A weaker yuan would supposedly make Chinese exports more competitive and hopefully spur growth in Asia’s largest economy.
But Lorraine Tan, director of Asia equity research at Morningstar, said a stronger US dollar would limit the People’s Bank of China’s ability to cut interest rates without risking increased capital outflows, as well as help the domestic economy have more monetary flexibility. .
China has been struggling to prop up its economy ever since last Septemberwith several stimulus measures including interest rate cuts and support for stock and real estate markets.
Recently, the country expanded its consumer replacement scheme to encourage consumption equipment upgrade and subsidies.
“That being said, it is fiscal spending that needs to be increased to support China’s growth,” Tan added.
This view was echoed by Ken Peng, head of investment strategy for Asia Pacific at Citi Wealth. He said the Chinese government should issue more long-term bonds to finance its economic stimulus, instead of cutting rates.
“[China] no monetary policy should be implemented anymore. So it shouldn’t be a PBOC issue. It should be [a] MOF [ministry of finance] question,” Peng said.
Also, in an often zero-sum world of export competitiveness, the marked weakness of the yuan could make it difficult for other Asian economies to make their products and services more attractive to foreign buyers.
Citi Wealth said in its 2025 outlook report that a sharp depreciation of the Chinese currency could hurt economies that directly compete with or export to China, such as South Korea, Taiwan and others in Southeast Asia.
Bank of Japan spent over 15.32 trillion yen ($97.06 billion) to support the currency through 2024, after the yen fell to multi-decade lows in July, reaching a low of 161.96.
Despite this, the currency stands at around 158 against the dollar, the weakest price since the July lows.
Japanese financial officials have repeatedly issued warnings against “one-sided” and “volatile” yen movements, most recently on January 7.
To be sure, a strong dollar could partially affect the BOJ’s targets.
After battling deflation for decades, Japan’s inflation has been above the BOJ’s 2% target for 32 consecutive months. The BOJ admitted this weakness of the yen could lead to a rise in imported inflation.
The challenge would be to ensure that prices and wages do not rise faster than the levels that the BOJ is comfortable with.
Morningstar’s Tan said the US dollar’s strength is increasing pressure on the BOJ to raise rates to support the yen and mitigate inflation risks.
In South Korea, its central bank recently intervened to support the won, according to a Jan. 6 Yonhap report. Although the exact amount was not disclosed, it was enough to trigger the attack the country’s foreign exchange reserves fell to a five-year low.
The won has depreciated steadily against the dollar since Trump’s election victory, hitting around 1,476 against the dollar in December, its lowest level since 2009.
The Bank of Korea appears to be prioritizing boosting domestic growth despite the weakening won bringing a surprise reduction of 25 basis points at its last meeting in November.
“Although exchange rate volatility has increased…downward pressure on economic growth has intensified. The Committee therefore concluded that it is appropriate to further reduce the base rate and mitigate downside risks to the economy,” the statement said. .
However, all these measures were overshadowed by uncertainty when President Yoon Suk Yeol declared and then revoked a state of emergency in early December, and was then revoked.
BOK convened an emergency session on December 4 and obliged to provide “a sufficient amount of liquidity” until the financial and foreign exchange markets stabilize. These measures will be in effect until the end of February.
Last among the major Asian currencies is India, which has seen rupee fall to a record low of 85.86 on January 8, due to pressure from the strong dollar and selling by foreign portfolio investors in October and November.
India is grappling with inflation that breached the RBI’s upper tolerance limit of 6% in October, reaching 6.21%, although it has moderated since then.
This comes at a time when the country is facing a slowdown in growth, as is India the latest GDP reading reaching 5.4% in its fiscal second quarter ended September, which was not expected and recorded the lowest level since the last quarter of 2022.
In their majority recent monetary policy meeting In December, the RBI kept rates at 6.5% in a split decision, with two board members voting in favor of a 25 basis point cut.
If India chooses to cut rates to stimulate growth – which would weaken the rupee – the RBI is well equipped to deal with a potential sudden outflow of foreign funds and any sharp fall in the rupee.
Citi Wealth said in its 2025 outlook report that “the central bank’s large foreign exchange reserves have brought greater stability to the Indian rupee.”
Citi’s Peng also describes the rupee as “one of the most stable currencies in the world,” adding that “the only currencies less volatile than the Indian rupee are pegged currencies like the Hong Kong dollar. And so this should come as a relief to many foreign investors who might be interested in this market.”
