(Bloomberg) -- Central banks across Asia face a difficult decision after the Federal Reserve’s hawkish cut — stage a costly fight back against dollar strength, or stand by and watch their currencies falter.
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The Federal Reserve’s signal that inflation concerns are back on the agenda led to a sharp selloff in currencies across Asia on Thursday, pushing the Indian rupee to a new all-time low against the greenback and the Korean won to its weakest level since the financial crisis. The Bloomberg Asia Dollar Index dropped around 0.4%.
The moves have reignited questions about how far central banks across Asia are willing to go to defend their currencies — and how much impact their moves will have. Indonesia’s central bank said on Thursday that it was intervening to push back against a selloff in the rupiah, while the People’s Bank of China used its daily reference rate to support the yuan.
“It is hard to fight the higher dollar move against Asian currencies when it is primarily dollar driven, which means regional central banks would have to play defence and try to smooth out depreciation pressure to try to keep an orderly FX market,” said Wee Khoon Chong, a strategist at BNY in Hong Kong.
Read: A $6 Trillion FX Pile Is Asia’s Shield From Resurgent Dollar
Bloomberg’s Asia currency index has lost almost 4% this year, as the election of Donald Trump and shifting expectations of Fed policy have encouraged a shift to dollar assets.
The latest selloff in Asia was fueled by the Fed’s so-called hawkish cut, when a reduction in interest rates was followed by remarks that made clear the central bank is still worried about inflation. The median Fed policymaker forecasts now sees just a half-percentage point of reductions next year, half of what was expected in September.
The Bank of Japan stood pat at its own monetary policy meeting on Thursday, with a lone dissenter calling for an increase in rates. BOJ Governor Kazuo Ueda is attempting a so-called normalization following years of ultra-loose monetary policy, but the central bank has made clear it is willing to wait for the right moment to hike rates.
The Japanese yen declined as much as 1.3% against the dollar.
Central Bank Pushback
Central banks in Asia have taken different approaches to containing dollar bulls over the past few months. While Bank Indonesia has been been vocal about its interventions, the Reserve Bank of India has preferred to operate quietly, using a mix of offshore and onshore trades to bolster the rupee without public confirmation. Other central banks have used public statements to try to influence sentiment.
The People’s Bank of China ramped up its support for the yuan on Thursday by setting a daily reference rate that was significantly stronger than the average in a Bloomberg survey. The so-called fixing, which limits moves in the onshore yuan by 2% on either side, is at its strongest level relative to the forecast since July.
“The PBOC will continue to restrain the upside pressures on dollar-yuan for now, but I think the exchange rate will break to new highs in 2025 on the outbreak of a second US-China trade war,” said Alvin T. Tan, head of Asia FX strategy at RBC Capital Markets.
Chinese state banks sold the dollar in the onshore market at the open and hardly offered to buy the greenback, according to traders. The traders asked not to be identified as they are not allowed to comment on the foreign-exchange market.
The dollar rally has complicated a widespread shift to monetary easing in Asia, with central banks across the region cutting rates this year. Weaker currencies tend to raise the price of imports to a country, fueling domestic inflation. Further rate cuts could also put more pressure on currencies as investors look elsewhere for returns, exacerbating the impact of dollar strength.
“Asian central banks may need to focus on defending their currencies rather than cutting rates to support their domestic economies,” said Marcella Chow, global market strategist at JPMorgan Asset Management, adding that central banks were still likely to maintain their easing bias.
READ: Asian Markets May See Outsized Slump After Fed, Analysts Say
--With assistance from Wenjin Lv, Qizi Sun and Katia Dmitrieva.
(Changed headline. Added details of Bank of Japan meeting.)
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