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Asian emerging market currencies come under pressure from strong dollar

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Indonesia’s central bank intervened to support the rupiah on Tuesday, while the Indian rupee slumped to a record low as a surging dollar sparked a rout in emerging market currencies.

Escalating tensions in the Middle East following Iran’s attacks on Israel and growing expectations that the Federal Reserve will delay rate cuts have boosted the US currency.

Last week, the greenback posted its strongest weekly performance since 2022 after solid US inflation figures increased bets that the Fed will keep rates higher for longer.

The Indonesian rupiah slipped to 16,200 against the dollar, its lowest in four years, as markets in Jakarta reopened after a week-long holiday. It has dropped around 5 per cent this year and is one of the worst-performing currencies in Asia. 

Also on Tuesday, India’s rupee fell to a record low of 83.535 against the dollar, the Korean won fell to a 17-month low and the Malaysian ringgit was trading close to a 26-year low. 

Trinh Nguyen, senior economist at Natixis, said central banks in emerging economies could respond by raising rates to arrest the fall of domestic currencies in addition to intervention in the foreign exchange market. The possibility of a rate increase in Indonesia in particular had risen, she said.

“The Indonesian rupiah has weakened a lot on the back of current account deficit and capital outflows from risk aversion. If that trend continues into next week, I wouldn’t be surprised if the central bank raises rates.”  

Bank Indonesia is scheduled to hold a monetary policy meeting on April 23 and 24. It is widely expected to begin cutting rates later this year.  

The rupiah is the second highest-yielding currency after the Indian rupee, but is much more vulnerable as it depends more on foreign financing of bonds, Nguyen said. 

The rupiah has also taken a hit this year from concerns that president-elect Prabowo Subianto’s populist policies could hurt Indonesia’s fiscal strength.

Prabowo, who takes over from Joko Widodo in October, has promised to launch a free meals and milk programme for schoolchildren that is expected to cost Rp460tn ($28.4bn).

Kishore Narne, director of commodities and currency at Mumbai-based financial services group Motilal Oswal, said geopolitics, the dollar’s strength and local demand for the greenback at the start of India’s financial year in April has helped push the rupee down.

The Reserve Bank of India has previously intervened to manage the currency’s weakness. “The RBI generally tends to control the volatility, they won’t let it slip beyond 84,” Narne said. 

Other central banks have hinted at taking action to support their depreciating currencies. 

Bank Negara Malaysia will “ensure sufficient liquidity and orderly functioning of the foreign exchange market . . . and manage any risks arising from heightened financial market volatility,” it said in a statement on Monday.

“BNM has engaged with financial market participants, including heads of treasury operations, who concur that any uncertainties would recede and stabilise once the geopolitical situation de-escalates.”

The South Korean won hit a 17-month low on Tuesday, breaching a major psychological threshold of 1,400 per dollar. It suffered the biggest drop among major currencies in the world this month, falling nearly 4 per cent. The currency has lost 8.7 per cent of its value so far this year.

The rising tensions in the Middle East have added pressure on the won, as South Korea is a big importer of oil from the region. The won is also moving in tandem with the Chinese renminbi, with China being the country’s biggest trading partner.  

Alarmed by the won’s sharp fall, Korean authorities made verbal intervention on Tuesday. “We are closely watching forex moves and supply and demand with special caution. Excessive herd behaviour is not desirable for our economy,” officials in the finance ministry and the Bank of Korea said in a joint statement. 

Following the remarks, the won pared some losses, closing local trade at 1,395 per dollar.

Christopher Wong, foreign exchange strategist at OCBC, said a weaker renminbi reference rate by China was adding to the pressure from a stronger dollar.

“[The currencies] could potentially still weaken a bit if these factors continue to play out, but policymakers are also stepping in to stop market volatility.”

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