Emerging Markets Form Line of Defence Against Rising US Dollar
Bangko Sentral ng Pilipinas is watching the peso’s drop closely and has stepped up intervention in the currency market, Governor Eli Remolona said on Friday (Dec 20). Brazil’s central bank has spent US$17 billion in the past week to support the real, while Bank Indonesia vowed to guard the rupiah "boldly" to build market confidence. In Europe, Hungary’s central bank joined the trend, raising the interest rate on its foreign-currency swap tender to calm markets.
Global Impact of Strong US Dollar
Authorities in developing economies are on the defensive as the greenback’s strength wreaks havoc across global markets, with South Korea’s won falling to the lowest in more than 15 years while India’s rupee and the real crashed to all-time lows. A rapid decline in currencies risks worsening the impact of imported inflation for emerging markets, and may also increase the cost of servicing debt on foreign liabilities.
Central Banks Intervene
"It is hard to go against a strong US dollar trend," said Christopher Wong, currency strategist at OCBC in Singapore. "Intervention in such an environment can only slow the pace of currency depreciation. Despite that, central banks may still have to use a mix of verbal and actual intervention tools."
Developed Markets Also Feel the Heat
Developed nations are also feeling the heat. Japan ramped up its warnings against currency speculation on Friday after the yen slid to a five-month low, with Finance Minister Katsunobu Kato cautioning that authorities will take appropriate action if there are excessive moves in the foreign-exchange market.
The Cost of Defence
But the pushback against a stronger US dollar comes at a cost, with monetary authorities forced to dip into their foreign-exchange reserves to defend their currencies.
Conclusion
The rising US dollar is causing a stir in global markets, with emerging market currencies taking a hit. As a result, central banks are stepping in to defend their currencies, but at a cost. It remains to be seen how this plays out, but one thing is certain: the strong dollar trend is here to stay.
Frequently Asked Questions
Q: What is the cause of the strong US dollar?
A: The Federal Reserve’s forecast of fewer interest-rate cuts next year and its signal that inflation concerns are back on the radar.
Q: How are emerging market currencies faring?
A: Many emerging market currencies, such as the real, Hungarian forint, and Chilean peso, have fallen to multi-year lows.
Q: Are developed markets also affected?
A: Yes, even developed nations like Japan are feeling the heat, with the yen sliding to a five-month low.
Q: What is the cost of defending currencies?
A: Central banks are forced to dip into their foreign-exchange reserves to defend their currencies, which can be costly.
