A two-front battle rages across Asia! Pressure from soaring oil prices and a stronger dollar is weakening many currencies, forcing central banks to weigh between curbing inflation and supporting the economy.
June 10, 2569 at 15.42:XNUMX, Nikkei Asia reported that Asian countries are facing increasing economic pressure from soaring oil prices due to the Iran-Iran conflict. Meanwhile, the strengthening of the US dollar and expectations that the Federal Reserve (Fed) may raise interest rates are placing a heavier burden on many countries to protect their currencies.
Many countries are accelerating the implementation of measures to prop up their currencies. Reuters reported that South Korea's national pension fund engaged in foreign exchange hedging on Monday, helping the won recover from its weakest level in 17 years. Meanwhile, the Reserve Bank of India announced several measures to support the rupee, including special foreign exchange swap rates.
The dollar's main support came from stronger-than-expected U.S. employment data. Although President Donald Trump called for the Fed to cut interest rates, markets are beginning to believe that the Fed may need to raise rates to counter increasing inflationary pressures stemming from the war.
The rupiah suffered the sharpest drop in Asia.
Since the Iran-Iran conflict began in late February, the Indonesian rupiah has depreciated by more than 7%, the most in Asia, continuing a weakening trend that has lasted for several years. This is followed by the South Korean won, the Philippine peso, the Thai baht, and the Indian rupee. The Malaysian ringgit, which had previously held strong due to its status as an oil-exporting country, has also begun to weaken due to domestic political uncertainty. Analysts believe that the fundamental factors of each country play a significant role in the strength of their currency.
Li Lin, Head of Asia Market Research at MUFG, stated that while Asia is the region most affected by oil prices, each country has a different level of vulnerability, depending on its energy structure, reliance on imports, and available fuel reserves.
Lavanya Venkateswaran, senior economist at OCBC Bank, stated that in addition to being an energy importer or exporter, fiscal strength, government credibility, and progress on economic reforms are also key factors determining investor confidence.
Asian central banks face a difficult choice.
The most commonly used tool for hedging a currency is raising interest rates.
Indonesia's central bank surprised markets in May by raising interest rates by 0.50% to 5.25% following an emergency meeting. This marked the second consecutive month of rate hikes, reflecting the authorities' view that protecting the currency was an urgent matter.
The Philippine central bank raised interest rates by 0.25% in April and signaled its readiness to raise rates further outside of scheduled meetings if necessary.
Trinh Nguyen, senior economist at Natixis, believes that many Asian countries still have interest rates that are too low relative to inflation and developed countries, making it easier for capital to flow out.
However, many analysts warn that raising interest rates could further exacerbate an economy already being impacted by high energy prices.
"Ultimately, central banks must choose between controlling inflation and maintaining economic growth, which is a very difficult decision, and the longer this conflict drags on, the harder it becomes," Li said.
Many countries are selling U.S. bonds to hedge their currencies.
Another measure used by many countries is to intervene in the financial markets by selling international reserves, especially U.S. government bonds.
China was the largest seller of U.S. Treasury bonds during February and April, with a value of $37,600 billion, followed by Japan with $36,700 billion.
However, in terms of proportion of reserves, Indonesia sold the most, at 17.1% of its holdings of US bonds, or approximately $4,800 billion, while South Korea and the Philippines sold 11.2% and 11%, respectively.
Analysts believe that bond sales help support the currency in the short term, but they do not solve structural problems, especially in Indonesia, where investors remain concerned about the credibility of economic policies and the direction of the country's reforms.
Jason Tuvey of Capital Economics stated that raising interest rates is merely a short-term solution. What is really needed is to implement more investor-friendly policies.
While some analysts warn that if pressure on currencies continues to increase, some governments may have to consider stricter measures, such as capital controls.
While the selling of U.S. bonds contributed to higher yields, experts believe the impact was limited due to the large size of the U.S. bond market and the continued availability of investors willing to buy when yields are attractive.
refer : asia.nikkei.com
Read news related to All situations surrounding Asia can be found here.
