(Bloomberg) -- A $6.4 trillion foreign-exchange reserve pile in Asia is giving investors confidence that central banks have the ammunition to fight the dollar’s strength stemming from the US presidential election.
Asian currencies have come under pressure in October, as rising odds of a Donald Trump presidency and uncertainties over the pace of the Federal Reserve’s easing bolstered the greenback. A Bloomberg index of the region’s currencies just had its worst month since February 2023, with the Indian rupee near its weakest ever and South Korea’s won close to a three-month low.
Strategists expect the losses to extend, especially if Trump returns to power and reignites a trade war. However, a years-long increase in FX reserves means central banks are in pole position to smooth volatility, according to Barclays Plc and MUFG Bank Ltd. That firepower is important since the Fed is no longer in a tightening cycle, making interest rate hikes to support currencies a difficult option for Asia’s central banks.
“Asian FX reserves have continued to grow and there’s certainly plenty of ammunition,” said Mitul Kotecha, head of FX and EM macro strategy for Asia at Barclays. While markets have priced in a Trump victory, “we still expect to see some further pressure on Asian currencies should that be the case,” he added.
The $6.4 trillion pile for Asia ex-Japan compares with $6.2 trillion at the end of 2023 and $5.9 trillion the year before, according to data from 10 economies compiled by Bloomberg. China accounts for almost half of the reserves, while India’s has swelled to a record $700 billion.
India, Thailand, and the Philippines are among the nations that rank high in terms of the sufficiency of reserves to protect currencies, according to Nomura Holdings Inc and Bank of America. Vietnam and Malaysia are less comfortably placed, according to MUFG Bank Ltd.
FX Volatility
The sudden weakness in Asian currencies has come as a surprise for many, as the dominant market view until just a few months ago was that the dollar will soften along with the Fed’s easing. Armed with the mountain of reserves, central banks have been vowing action against volatile swings, worried about capital outflows and constraints to their monetary policy room.
South Korea has promised to act swiftly to curb excessive volatility in the won while an Indonesian official said the central bank stands ready to step into the market.
Reserve Bank of India Governor Shaktikanta Das has been vocal about the need to build reserves, calling the stockpile a “safety net” against any volatile capital flows.
There are other tools, also.
In China, foreign-exchange swaps have quietly become a key tool for state-run lenders seeking to prop up the yuan. Malaysia’s central bank has been encouraging state-linked firms to repatriate foreign investment income and convert it into the local currency.
Keeping currencies stable has become all the more important as central banks start lowering rates to tackle slowing economic growth. Bank Indonesia kicked off the region’s easing cycle with an unexpected rate cut in September, followed by South Korea, Thailand and the Philippines in October.
With the greenback likely to be supported amid election-related uncertainties, Asian officials will remain on guard. TD Securities strategist Prashant Newnaha expects a “multi-month dollar run higher.”
“Asia’s FX reserves cover are more than adequate across most countries,” said Michael Wan, senior currency analyst at MUFG Bank. “FX reserves should be most Asian countries’ first line of defense, but perhaps more so for countries such as India and Indonesia which prefer and target FX stability.”
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