Asian Central Banks Face Currency Weakness as US Dollar Strengthens

Central banks across Asia are grappling with the challenge of weakening currencies as the US dollar continues to strengthen, complicating their path towards easing monetary policy. The resilience of the US economy and expectations for delayed Federal Reserve rate cuts have fueled the dollar's rise, putting pressure on Asian currencies, as reported by Moody's Analytics.

The Malaysian ringgit, Indian rupee, and New Taiwan dollar are hovering near multi-year lows against the US dollar, while the Thai baht has experienced a significant decline this year. This currency depreciation limits the ability of Asian central banks to lower interest rates, as premature easing could exacerbate currency weakness.

"Currency developments mean that Asia’s central banks will only cut rates after the Fed; moving prematurely could trigger further currency depreciation," explains the Moody's Analytics. "This could mean that domestic economic needs play a secondary role to offshore factors."

In response to these challenges, some central banks have taken action to prevent disorderly depreciation. Bank Indonesia surprised markets with a 25-basis-point rate hike to support the rupiah, while Taiwan's central bank also implemented a surprise hike in late March. Malaysia has encouraged government-linked firms to convert repatriated foreign investment income into ringgit to bolster the currency.

The Japanese yen has been particularly hard hit, reaching a 34-year low against the dollar before rebounding after suspected intervention by authorities.

While speculation of further tightening by the Bank of Japan has increased, weak domestic demand may limit the central bank's ability to raise rates.

"Conditions at home cannot be ignored and are not ripe for further rate hikes, no matter how small these might be," states the Moody's Analytics report. "Policymakers will be closely watching how consumption responds to the return of real wage growth later this year. At this point, domestic demand is weak, making it hard for the BoJ to justify another hike."