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A surprise interest-rate cut in Indonesia and signs the Reserve Bank of India is loosening its tight grip on the rupee suggest central banks' defense against a strong dollar is starting to crack.
Asian central banks have been shielding their currencies through interventions in the face of the greenback's relentless rally fueled by bets that US President-elect Donald Trump's low-tax, high-tariff policies will fuel inflation. However, that approach is shrinking the foreign-exchange stockpile of some of these nations, with persistently sluggish growth forcing some central banks to prioritize boosting their economies over currency management.
"I reckon Asian central banks will throw in the towel soon on aggressive defense of their currencies if Trump moves ahead with tariffs in a strong dollar regime," said Alex Loo, macro strategist at TD Securities. "Asian central banks are likely paying more attention to their drawdown of their FX reserves and if trade starts to slow globally, that implies less dollars to add to their reserves."
Large foreign-currency reserves with Asian central banks were instrumental in safeguarding the region's currencies. However, India's forex reserves have slid $70 billion since hitting a record high of $705 billion as of end-September while Korea's pile dropped over $50 billion over two years.
Meanwhile, the dollar continues to be resilient and uncertainties surrounding Trump's policies ahead of his inauguration next week are providing little comfort for Asia's currency traders as they've made interest-rate decisions increasingly difficult to predict.
The Bank of Korea held rates steady on Thursday, belying expectations of a third consecutive cut, saying it was a tough call to shore up a currency battered by political turmoil. The Indonesian central bank on the other hand surprised with a rate cut on Wednesday to bolster the economy even as the move pummeled the currency.
"The surprising rate decisions underscored heightening uncertainties over the emerging Asia rate and currency outlook," said Ken Cheung, strategist at Mizuho Bank in Singapore. "It seems Asian central banks are struggling to achieve the targets of FX stability and supporting growth simultaneously ahead of tariffs threats."