On April 29, 2024, on a street in central Tokyo, a man looked at the window of a money changer, which displayed the exchange rates of various currencies against the yen.
Richard A. Brooks | AFP | Getty Images
In 2025, Asian central banks will face a Catch-22.
The dollar’s continued rise has sent Asian currencies such as the Japanese yen, South Korean won, Chinese yuan and Indian rupee to multi-year lows against the greenback.
While currency depreciation could in principle make exports competitive, as President-elect Donald Trump has threatened to impose tariffs, Asian central banks need to assess their impact on imported inflation and avoid speculative bets on continued weakness in their currencies. Note that this could complicate policymaking, analysts said.
Since Trump won the 2024 presidential election, the U.S. dollar has appreciated significantly, rising by about 5.39% since the U.S. election on November 5.
The dollar’s strength is partly due to policies Trump promised on the campaign trail, including tariffs and tax cuts, which are seen as Economists think of inflation.
Federal officials expressed concerns at their December meeting about inflation and the possible impact of President-elect Donald Trump’s policies and said they would be slow to cut interest rates because of uncertainty, minutes of the meeting released Wednesday showed.
A reassessment of the Federal Reserve’s monetary policy outlook widened the yield gap between U.S. and several Asian bonds.
The spread 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 dollar will make it harder for Asian central banks to manage their economies.
Ooi told CNBC via email that a stronger dollar could “create challenges for Asian central banks, as higher import costs would increase inflationary pressures and strain their foreign exchange reserves if they try to intervene to support their currencies.”
“If a country is grappling with high inflation and currency depreciation, lowering interest rates to stimulate economic growth may be counterproductive,” Huang added.
China’s onshore yuan hit a 16-month low of 7.3361 on January 7, pressured by rising U.S. Treasury yields and a stronger dollar.
A weaker yuan would ostensibly make Chinese exports more competitive and could spur growth in Asia’s largest economy.
But Lorraine Tan, head of Asian equity research at Morningstar, said a stronger dollar would limit the People’s Bank of China’s ability to lower interest rates without risking increased capital outflows and help the domestic economy have greater monetary flexibility.
Since then, China has struggled to support its economy last septemberA number of stimulus measures were taken, including cutting interest rates and supporting the stock and housing markets.
Recently, the country expanded its consumer trade-in program to stimulate consumption through: Equipment upgrades and subsidies.
“Having said that, fiscal spending needs to be stepped up to support China’s economic growth,” Tan added.
Ken Peng, head of investment strategy for Asia Pacific at Citigroup Wealth, also agrees with this view. He said the Chinese government should issue more long-term bonds to fund its economic stimulus rather than cut interest rates.
“(China) doesn’t need to adopt any monetary policy anymore. So this shouldn’t be a problem for the People’s Bank of China. This should be a problem for the Ministry of Finance,” Peng said.
Moreover, in a world where export competitiveness is often zero-sum, the yuan’s apparent weakness could make it more difficult for other Asian economies to make their products and services more attractive to foreign buyers.
Citi Wealth said in its 2025 outlook report that a sharp depreciation of the yuan could harm economies that compete directly with China or export to China, such as South Korea, Taiwan and other Southeast Asian countries.
Bank of Japan Spending more than 15.32 trillion yen ($97.06 billion) to support the yen in 2024 after it fell to multi-decade lows in July, It hit a low of 161.96.
Still, the currency is trading around 158 against the dollar, its lowest since July.
Japanese financial officials have repeatedly warned against “unilateral” and “volatile” trends in the yen, most recently on January 7.
To be fair, a strong dollar may partially achieve the Bank of Japan’s goals.
Japan has been grappling with deflation for decades, with inflation above the Bank of Japan’s 2% target for 32 consecutive months. this The Bank of Japan has acknowledged A weaker yen could lead to higher imported inflation.
The challenge is to ensure that prices and wages do not rise faster than the Bank of Japan is comfortable with.
Morningstar’s Tan said the dollar’s strength has increased pressure on the Bank of Japan to raise interest rates to support the yen and mitigate inflation risks.
In South Korea, the Bank of Korea recently intervened to support the won, Yonhap News Agency reported on January 6. Although the specific amount was not disclosed, it was enough to cause The country’s foreign exchange reserves fell to a five-year low.
The South Korean won has depreciated steadily against the U.S. dollar since Trump won the election, hitting about 1,476 per dollar in December, its lowest level since 2009.
South Korea’s central bank appears to prioritize stimulating domestic growth despite won’s weakness Unexpected rate cut of 25 basis points at the last meeting in November.
“Despite the intensified exchange rate fluctuations… the downward pressure on economic growth has increased. Therefore, the board of directors believes that it is appropriate to further reduce the benchmark interest rate and mitigate the economic downside risks,” the central bank wrote in a statement.
However, all these measures were overshadowed by uncertainty when President Yoon Seok-yeol announced and subsequently lifted martial law in early December and was subsequently impeached.
The Bank of Korea held an emergency meeting on December 4. Promises to provide “ample liquidity” until financial and foreign exchange markets stabilize. These measures will last until the end of February.
The last of the major Asian currencies is India, which has rupee It fell to a historical low of 85.86 on January 8, due to pressure A stronger dollar and selling by foreign portfolio investors in October and November.
India is grappling with inflation, which breached the Reserve Bank of India’s 6% ceiling in October to 6.21%, but has since slowed.
This comes at a time when India is facing a slowdown in growth Latest GDP readings Growth in the second fiscal quarter ended in September was 5.4%, lower than expected and the lowest level since the last quarter of 2022.
at its most Recent monetary policy meetings In December, the Reserve Bank of India kept interest rates at 6.5% in a split decision, with two board members voting for a 25 basis point cut.
If India chooses to cut interest rates to stimulate growth (which would weaken the rupee), the RBI is well-positioned to deal with potential sudden foreign capital outflows and a sharp depreciation of the rupee.
Citi Wealth said in its 2025 outlook report that “the central bank’s large foreign exchange reserves have brought greater stability to the Indian rupee.”
Citibank’s Peng also described the rupee as “one of the most stable currencies in the world,” adding, “The only currencies 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 .
