SINGAPORE: The worst may soon be over for Asia’s emerging market currencies, which have come under pressure from the Iran war, as central banks have begun stepping up their support, having stashed away extra reserves for just such a situation.
Policymakers in Indonesia, India and Taiwan have all intervened in foreign exchange markets over the past two weeks, while China signalled support for its currency by setting a stronger daily fixing.
A number of other authorities have issued verbal warnings as they seek to damp volatility.
Regional central banks have, in one sense, been preparing for such a challenge for a number of years.
They have accumulated about US$8 trillion of foreign-exchange reserves, an increase of about US$600bil since the end of 2024, based on Bloomberg calculations that also include Japan.
Those funds are being put to good use as the Iran war puts Asian currencies under pressure due to the US dollar’s resurgence as a haven, the region’s exposure to soaring oil costs, and the risk of a global economic slowdown.
A number of Asian currencies have fallen but “we expect that downside risks may now be more limited, particularly as the authorities are likely to act against disorderly market moves”, said Clifford Lau, a fund manager at William Blair Investment Management in Singapore.
“Asian central banks have accumulated ample foreign exchange reserves over the past decade, providing substantial buffers to manage volatility and defend external positions,” he said.
Asian currencies slumped when trading began following the start of the Iran war on Feb 28, joining a rout in risk assets around the world. Since the crisis began, the South Korean won has dropped to the weakest level since 2009, and the Indonesian rupiah and Indian rupee have both sunk to record lows.
Central banks around the region have been quick to respond.
Bank Indonesia pledged on March 4 to make “firm and consistent” intervention in both onshore and offshore markets to cushion the rupiah.
While the currency fell to a record low on March 9, analysts expect the central bank will defend the 17,000-per-dollar level.
The Reserve Bank of India also intervened in both offshore and onshore markets to contain the rupee’s losses.
The central bank said on March 6 that it was buying one trillion rupees (US$11bil) of bonds to support the currency.
Taiwan’s central bank stepped into the market this month due to large outflows, the head of the authority’s foreign exchange department said on March 5.
China’s yuan managed to eke out a small gain last week after the central bank strengthened its daily yuan fixing for a record 15th straight week.
The fixing, now known as the daily reference rate, is the midpoint around which China’s currency is allowed to trade each day.
The combined actions have helped temper currency declines, with the Bloomberg Asia Dollar Index losing just 0.5% last week, less than half as much as the week before.
“We think most Asian central banks retain sufficient net reserves to manage periods of foreign exchange volatility,” said Fesa Wibawa, an investment manager at Aberdeen in Singapore. — Bloomberg
