A man looks into the window of an exchange shop showing the price of various currencies against the Japanese yen, along a street in central Tokyo on April 29, 2024.
richard a. brooks | AFP | Getty Images
Central banks in Asia face a major dilemma in 2025.
The continued rise in the price of the US dollar has pushed Asian currencies such as the Japanese yen, South Korean won, Chinese yuan and Indian rupee to multi-year lows against the US currency.
While a cheaper currency could in principle make exports competitive just as President-elect Donald Trump threatens to impose tariffs, central banks in Asia will need to assess their impact on imported inflation and avoid speculative bets on continued weakness in their currencies that could complicate… Policy making process. Analysts said.
The US dollar has risen sharply since Trump won the 2024 presidential elections, rising by about 5.39% since the elections held on November 5.
Part of the reason for the strength of the US dollar is the policies that Trump promised during his election campaign, including tariffs and tax cuts, which he sees as… Economists to inflation.
Fed 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 Wednesday showed.
The Fed's reassessment of monetary policy expectations has widened the yield gap between US bonds and many Asian bonds.
This interest rate differential has weakened the appeal of lower-yielding assets, sending major Asian currencies lower and prompting some central banks, including the Bank of Japan and the Reserve Bank of India, to intervene.
James Ooi, market strategist at online brokerage Tiger Brokers, told CNBC that a strong US dollar will make it harder for Asian central banks to manage their economies.
A stronger US dollar will likely “pose challenges to Asian central banks by increasing inflationary pressures through higher import costs and squeezing (central banks') foreign exchange reserves if they try to support their currencies through interventions,” Ooi told CNBC via email.
“If a country is suffering from high inflation and currency depreciation, cutting interest rates to stimulate economic growth can be counterproductive,” Ooi added.
The Chinese yuan recorded its lowest level in 16 months at 7.3361 on January 7, under pressure from rising US Treasury bond yields and the strength of the dollar.
A weaker yuan would make Chinese exports more competitive, we hope, and would hopefully stimulate growth in Asia's largest economy.
But Lauren Tan, director of Asia equity research at Morningstar, said a stronger US 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 domestic economy enjoy more monetary flexibility. . .
China has struggled to support its economy since then Last Septemberwith several stimulus measures including interest rate cuts and support for stock and real estate markets.
Recently, the country has expanded its consumer trade scheme with the aim of stimulating consumption Equipment upgrades and subsidies.
“However, it is the fiscal spending side that needs to rise to support China's growth,” Tan added.
This view was echoed by Ken Peng, head of investment strategy for Asia Pacific at Citi Wealth. He said the Chinese government should issue more long-term bonds to fund its economic stimulus, rather than cut interest rates.
“(China) does not need to take any further monetary policy. So it should not be a question for the People's Bank of China. It should be a question for the Ministry of Finance,” Peng said.
In an often zero-sum world of export competitiveness, an apparent weakness in the yuan may make it difficult for other Asian economies to increase the attractiveness of their products and services to foreign buyers.
In its 2025 forecast report, Citi Wealth said that a sharp decline in the value of the Chinese currency could harm economies that compete directly with or export to China, such as South Korea, Taiwan and other countries in Southeast Asia.
Bank of Japan Spent more than 15.32 trillion yen ($97.06 billion) to support the currency throughout 2024, after the yen fell to multi-decade lows in July. Reaching a low of 161.96.
Despite this, the currency stands at around 158 to the dollar, at its lowest levels since its lowest levels in July.
Japanese financial officials have repeatedly issued warnings against “unilateral” and “volatile” moves in the yen, most recently on January 7.
There is no doubt that the strength of the dollar may play a partial role in achieving the goals of the Bank of Japan.
After struggling to tackle deflation for decades, inflation in Japan has exceeded the Bank of Japan's 2% target for 32 months in a row. the The Bank of Japan has recognized A weak yen could lead to higher imported inflation.
The challenge is to ensure that prices and wages do not rise faster than levels with which the Bank of Japan is comfortable.
Morningstar's Tan said the strength of the US currency is increasing pressure on the Bank of Japan to raise interest rates in order to support the yen and mitigate inflation risks.
In South Korea, its central bank recently intervened to support the won, according to a report from Yonhap on January 6. Although the exact amount was not disclosed, it was enough to cause this to happen The country's foreign exchange reserves fall to their lowest levels in five years.
The won has steadily depreciated against the dollar since Trump's election victory, reaching around 1,476 won to the dollar in December, its weakest level since 2009.
The Bank of Korea appears to be prioritizing stimulating domestic growth despite the weak won, with the central bank… Enact a surprise cut of 25 basis points At its last meeting in November.
“Despite the increasing exchange rate volatility… downward pressures on economic growth have intensified. Therefore, the Governing Council considered it appropriate to continue lowering the base interest rate and mitigate downside risks to the economy,” he wrote in his statement. .
But all these measures were overshadowed by uncertainty when President Yoon Suk-yul declared and then repealed martial law in early December and was later removed.
The Bank of Korea held an emergency meeting on December 4 He pledged to provide “an adequate amount of liquidity.” Until the financial markets and foreign exchange markets stabilize. These measures will be in effect until the end of February.
Another major Asian currency is India, which has seen… rupee It fell to a record low of 85.86 on January 8, Because of pressure From the strength of the dollar and selling by foreign portfolio investors in October and November.
India is grappling with inflation that crossed the 6% cap set by the Reserve Bank of India (RBI) in October, reaching 6.21%, although it has moderated since then.
This comes at a time when the country is facing slowing growth, like India Latest GDP reading It reached 5.4% in the second fiscal quarter ending in September, defying expectations and recording its lowest level since the last quarter of 2022.
At its most extreme Last monetary policy meeting In December, the Reserve Bank of India kept interest rates at 6.5% in a split decision, with two board members voting in favor of a 25 basis point cut.
If India chooses to cut interest rates to stimulate growth – which would weaken the rupee – the RBI is well equipped to deal with a potential sudden inflow of foreign funds and any sharp decline in the rupee.
“The central bank’s large foreign exchange reserves have brought greater stability to the Indian rupee,” Citi Wealth said in its 2025 outlook report.
Citibank's Peng also calls the rupee “one of the most stable currencies in the world,” adding that “the only currencies that are less volatile than the Indian rupee are pegged currencies like the Hong Kong dollar. So this should be a relief to a lot of people.” Foreign investors who may have interest in this market.”
