In a unified stance against the strengthening dollar, Asian countries have taken proactive measures, emphasizing their collective pursuit for currency stability. Japan's leading currency official underscored the importance of this endeavor by reiterating the G-7's dedication to curbing erratic currency fluctuations. This week, South Korea engaged in discussions with Japan on currency concerns, securing a subtle approval from the United States, while China committed to minimizing excessive volatility in the yuan.
Central banks in emerging markets within the region have actively intervened, with Indonesia's central bank engaging in the spot and derivatives markets to bolster the rupiah, and Malaysia's authorities ready to utilize various tools to support the ringgit.
The foreign exchange markets have experienced significant turbulence, driven by robust US data that challenged the anticipated Federal Reserve interest rate cuts, thereby strengthening the dollar. Although recent efforts have managed to instill a temporary peace in Asia, the struggle against the dollar's dominance is far from over.
Experts argue that without a coordinated intervention from major central banks, the effectiveness of verbal interventions against the dollar's strength will be limited. The dollar's performance, having risen by approximately 4% this year, surpasses that of all major currencies, leaving Asian assets less attractive due to high Treasury yields.
The pessimism towards non-dollar currencies reached a new high this week, fueled by US economic data that exceeded expectations. Meanwhile, the yuan, often considered a stabilizing force in the region, depreciated to its lowest since November, indicating the central bank's tolerance for a controlled devaluation.
The drastic depreciation of currencies prompted a mention in the G-7's statement, which reaffirmed their 2017 commitment to addressing disorderly currency movements. However, analysts believe that the situation has not yet necessitated a collective intervention akin to the mid-1980s Plaza Accord.
Despite the challenges, there is a belief that currency intervention could provide temporary relief for regional currencies facing severe volatility. However, with a strong dollar and China's slow economic recovery, along with geopolitical tensions and upcoming US elections, currencies in Asia and emerging markets may face further hardships.
Authorities are inclined to intervene in the currency markets to gain time until the latter half of the year, hoping for a shift in macroeconomic and policy divergence.
