Asia’s central banks face a formidable challenge: a rising US dollar

Asia’s central banks face a dead end in 2025.

A relentless rise in the US dollar has seen Asian currencies such as the Japanese yen, South Korean won, Chinese yuan and Indian rupee stagger to multi-year lows against the dollar.

While a cheaper currency could, in principle, make exports competitive just as President-elect Donald Trump threatens to impose tariffs, Asia’s central banks would need to assess its impact on imported inflation and avoid speculative bets on sustained weakness. of their currencies that could complicate policy formulation. , the analysts said.

The US dollar has appreciated strongly since Trump won the 2024 presidential election, rising approximately 5.39% since the November 5 US election.

Part of the reason behind the strength of the US dollar is the policies that Trump had promised during the election campaign, including tariffs and tax cuts, which are seen by Economists are inflationists.

Federal officials at their December meeting expressed concern about inflation and the impact President-elect Donald Trump’s policies could have, indicating they would move more slowly on interest rate cuts because of uncertainty, minutes released on Thursday showed. Wednesday.

The Federal Reserve’s reassessment of its monetary policy outlook has widened the yield gap between US and several Asian bonds.

This interest rate differential has dampened the appeal of lower-yielding assets, sending major Asian currencies tumbling and prompting 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 would make it harder for Asian central banks to manage their economies.

A stronger US dollar is likely to “pose challenges to Asian central banks by increasing inflationary pressures through higher import costs and putting pressure on their (central banks’) foreign exchange reserves if they try to support their currencies through interventions” Ooi told CNBC via email.

“If a country is dealing with high inflation and a depreciating currency, lowering interest rates to stimulate economic growth can be counterproductive,” Ooi added.

China’s domestic yuan hit a 16-month low of 7.3361 on Jan. 7, pressured by rising U.S. Treasury yields and a stronger dollar.

A weaker yuan would apparently make Chinese exports more competitive and hopefully spur growth in Asia’s largest economy.

But Lorraine Tan, head of Asia equity research at Morningstar, said a stronger U.S. dollar would limit the People’s Bank of China’s ability to cut interest rates without risking increased capital outflows, as well as helping the national economy to have more monetary flexibility. .

China has been struggling to sustain its economy since last septemberwith several stimulus measures including interest rate reductions and support for the stock and real estate markets.

More recently, the country expanded its consumer goods exchange plan aimed at stimulating consumption through equipment upgrades and subsidies.

“That said, it is fiscal spending that needs to recover to support China’s growth,” Tan added.

Ken Peng, head of Asia Pacific investment strategy at Citi Wealth, echoed this view. He said the Chinese government should issue more long-term bonds to finance its economic stimulus, rather than cutting rates.

“(China) does not need to do more monetary policy. So it should not be a matter of the People’s Bank of China. It should be a matter of the Ministry of Finance (Ministry of Finance),” Peng said.

Furthermore, in the often zero-sum world of export competitiveness, a pronounced weakness in the yuan could make it more difficult for other Asian economies to increase the attractiveness of their products and services to foreign buyers.

Citi Wealth, in its 2025 outlook report, said a sharp depreciation of the Chinese currency could hurt economies that compete directly with China or export to China, such as South Korea, Taiwan and others in Southeast Asia.

The Bank of Japan spent more than 15.32 billion yen ($97.06 billion) to shore up the currency over the course of 2024, after the yen fell to multi-decade lows in July. reaching a low of 161.96.

Despite this, the currency stands around 158 against the dollar, its weakest level since July lows.

Japanese finance officials have issued repeated warnings against “unilateral” and “volatile” moves in the yen, most recently on Jan. 7.

Certainly, a strong dollar can partially contribute to the BOJ’s goals.

Having struggled to address deflation for decades, inflation in Japan has exceeded the BOJ’s 2% target for 32 consecutive months. He The BOJ has recognized That weakness in 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 the Bank of Japan is comfortable with.

Morningstar’s Tan said the strong dollar adds pressure on the BOJ to raise rates to prop up 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 specific amount was not disclosed, it was enough to cause the The country’s foreign exchange reserves fall to their lowest level in five years.

The won has steadily depreciated against the dollar since Trump’s election victory, reaching around 1.476 against the dollar in December, its weakest level since 2009.

The Bank of Korea appears to prioritize stimulating domestic growth despite the weaker won, and the central bank implement a surprise cut of 25 basis points at its last meeting in November.

“Although exchange rate volatility has increased… downward pressure on economic growth has intensified. Therefore, the Board considered that it is appropriate to further reduce the base rate and mitigate downside risks for the economy,” he wrote in his statement. .

However, all of these measures were overshadowed by uncertainty when President Yoon Suk Yeol declared and then revoked martial law in early December, and was subsequently impeached.

The BOK called an emergency meeting on December 4 and promised to provide “a sufficient amount of liquidity” until the financial and currency markets stabilize. These measures will be in force until the end of February.

Last among the major Asian currencies is India, which experienced the rupee fall to a record low of 85.86 on January 8, due to pressure due to the strength of the dollar and sales by foreign portfolio investors in October and November.

India is grappling with inflation that breached the RBI’s 6% upper tolerance limit in October, hitting 6.21%, although it has since moderated.

This comes at a time when the country faces a slowdown in growth, with India latest GDP reading reaching 5.4% in its second fiscal quarter that ended in September, missing expectations and marking its lowest level since the last quarter of 2022.

In its most 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 decides to cut rates to stimulate growth (which would weaken the rupee), the RBI is well equipped to deal with a possible 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 globally,” adding that “the only currencies that are less volatile than the Indian rupee are pegged currencies like the Hong Kong dollar. And this should be a relief for many foreign investors who may have interest in this market.”