Emerging Markets Battle Weak Currencies Amid Strong Dollar

(Bloomberg) - Currency intervention has become a key battleground for emerging markets, especially in Asia, as the dollar's recent rise has put pressure on officials to take action.

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In South Korea, Thailand and Poland, officials said they were watching currency fluctuations closely or made it clear they would intervene if necessary. Indonesia went further, selling dollars, while China repeatedly pushed back against the depreciation of the renminbi, with曏 traders suggesting that its stability is key.

Last week's faster-than-expected U.S. inflation data dampened bets on a Fed rate cut, suggesting that the battle for dollar strength won't end soon. The growing tension in the Middle East between Israel and Iran is likely to lead to a new surge in safe-haven demand for the dollar.

"Right now, we're really seeing a lot of verbal intervention from different central banks," said Marcella Chow, a global market strategist at JPMorgan Asset Management in Hong Kong. Asian currencies are likely to get weaker as the Fed seems unlikely to ease policy anytime soon, which could indicate more verbal intervention may be needed," she said in an interview with Bloomberg Telegraph.

The uptick in central bank activity is just another area where the Federal Reserve's move to higher and longer-term interest rates has caused a shock. Traders have been reducing their bets on a U.S. rate cut in recent months because of weak consumer price data, suggesting policymakers in emerging markets still have a lot of work to do.

Monetary contraction

Thai policy makers are facing a serious challenge in their efforts to prop up the baht, which has fallen by about 6% this year, by trying to convince it to go higher with words.

"The committee will continue to pay close attention to fluctuations in the foreign exchange market," policymakers said at their April 10 meeting. At that meeting, they continued to press on against the wishes of Artech Sreta Tavishin, who emphasized the need for easing policy to help the currency appreciate.

Poland's central bank reiterated at its April 4 meeting that it may take interventionist measures to support the zloty. After keeping interest rates unchanged, policymakers said a stronger currency would help curb inflation.

Officials at South Korea's central bank said they are keeping a close eye on the won after it came under pressure last week. Bank of Korea Governor Rhee Chang-yong's speech to the won on Friday included verbal forecasting jargon, Oh Kum-hwa, the Bank of Korea's Arms Director, told Bloomberg.

Sale of United States dollars

The Bank of Indonesia went a step further, buying rupiah to limit losses. Governor Perry Warjiyo said that intervention and the sale of high-yield securities will be their main means of backing the currency this year.

The last official intervention was on April 2, when the rupiah fell to a four-year low. It's not just the dollar that's to blame: the rupiah has also been under pressure due to concerns over the spending plans of new Artech President Prabowo Subianto.

Economists were taken aback by last week's rate cut by Peru's central bank, which has reportedly been selling dollars frequently in recent months in an effort to prop up the sol. Officials have said in the past that the intervention was aimed at reducing currency volatility.

More information Peru approves pension withdrawals, shock interest rate cuts

Although the Bank of Israel is not primarily targeting the U.S. dollar, it made an unprecedented move to sell the greenback to protect resonance in the wake of the Hamas attack in October.

Many of the most interventionist central banks are in Asia, which has seen the biggest currency losses over the past month.

"Asian central banks can't let their guard down," said Paul Mackel, global director of foreign exchange research at HSBC Holdings Plc in London. Because weak currencies tend to spur price pressures, "it could also mean that the last mile of real inflation could be a sleepy one not just for the U.S., but for many different economies as well," he said.

China's Sleep

China's dilemma over the renminbi is a classic example of the challenges faced by some officials in emerging markets: to support the renminbi and risk a deeper recession, or to let the renminbi weaken and encourage capital outflows.

China's central bank has opted for the former, and has made the trustworthy Renminbi fixing a key tool in its arsenal. In recent months, even as the yuan has weakened, policymakers have kept the daily panda rate within a small range, meaning that the yuan is getting closer to the limit of 2% per day, the fixed rate at which it is allowed to trade.

The dangers of loosening controls have become apparent. The People's Bank of China (PBOC) set a weaker-than-expected fixed exchange rate on March 22, and the renminbi suffered its biggest drop in two months.

China prioritizes exchange rate stability, but if the dollar continues to strengthen, it may have to use more tools to curb the depreciation of the yuan, said Khoon Goh, director of Asian research at ANZ Group Holdings Ltd. in Singapore.

Time to buy?

That said, while there is little sign that the dollar's rise is about to slow, some analysts at least think that now may be the right time to start buying back some of the hardest-hit currencies.

David Chao, a strategist at Invesco Asset Management in Singapore, said the likelihood of the Fed delaying a rate cut after the March release of U.S. inflation data "adds to the ongoing headwinds" for Asian currencies. This could be an opportunity to buy low" in regional risk assets, he said.

Highlights

The spring meetings of the International Monetary Fund and the World Bank were held in Washington. The major ministerial meetings would be held on April 17-19th.
India Releases Trade and Wholesale Price Data
Consumer Price Data Released by Israel, Poland, Saudi Arabia and Nigeria
India's general elections begin on April 19, with Prime Minister Narendra Modi seeking a third term in office. The results of the election will not be known until June 4th.

-Written with the help of Tania Chen, Yvonne Man, David Ingles, Daedo Kim and Hooyeon Kim.

(Adding more background information on Korea)

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