How Should Asian Currencies Respond to the Strong US Dollar?

　　As important US data continues to be released, more and more investors see the US economy heading towards a situation where it cannot land, namely, inflation failing to reach the Federal Reserve's target of 2%, while the US economy continues to grow.

US Inflation Data Sparks Concern

　　Investors have long been worried about interest rates staying high, coupled with disappointing earnings reports, leading to a downturn in the US stock market on Wednesday after a green opening.

　　The S&P 500 Index (^GSPC) closed down about 0.6%. The Dow Jones Industrial Average (^DJI) fell 0.1%. Meanwhile, the tech-heavy Nasdaq Composite Index (^IXIC) led the decline, dropping by more than 1%.

　　Image Source: TradingView

　　At the beginning of the year, artificial intelligence drove the surge in tech stocks, but these stocks also led the decline in this downturn. Nvidia (NVDA) fell nearly 4%, Meta (META) fell over 1%. The Technology sector (XLK) was the worst-performing sector in the S&P 500 Index, falling nearly 1.5%.

　　Recent concerns about escalating tensions in the Middle East have dealt a second heavy blow to the stock market, coupled with uncertainty about the timing and frequency of Federal Reserve rate cuts, making it difficult for the stock market to rebound in the short term.

　　Loretta Mester, President of the Federal Reserve Bank of Cleveland, said on Wednesday that she expects further easing of price pressures this year, which would create conditions for the Federal Reserve to lower borrowing costs, provided that the Federal Reserve is quite confident in inflation reaching its target of 2%.

　　Mester emphasized, “As our confidence grows, we will begin to normalize policy at some point, returning to a less restrictive stance, but there is no need for us to rush into this step.”

　　Image Source: Yahoo Finance

　　Other Federal Reserve officials have also made similar remarks, deviating from guidance on the timing of rate cuts. Federal Reserve Chairman Jerome Powell said on Tuesday that interest rates may remain at higher levels for a longer period of time.

　　Financial markets have already received this information. Futures traders linked to the Federal Reserve policy rate are currently pricing in the first rate cut in September, with only about a 50-50 chance of further rate cuts by the end of the year.

　　Hopes for lower rate cuts have strengthened the dollar, and the strength of the dollar is putting pressure on Asian currencies across the board, prompting central banks in various countries to speak out intensively to support their currencies.

Pressure on Asian Currencies

　　Federal Reserve Chairman Powell has once again lowered market expectations for rate cuts, stating that the latest data shows insufficient inflation growth, so extending the time for high-interest-rate policies may be more appropriate. This statement has led to a rapid rise in the dollar index, surpassing the 106.50 level, hitting new highs for the first time since November 1, 2023, for two consecutive days, and reaching new highs for five consecutive months.

　　Against the backdrop of a stronger dollar, currencies of major Asian economies such as the yen, Indian rupee, and South Korean won, as well as small currencies of ASEAN countries such as the Indonesian rupiah, Vietnamese dong, and Philippine peso, have all faced renewed selling pressure. Central banks in various countries are taking swift action to deal with this pressure.

　　According to a statement from the South Korean Ministry of Finance, South Korean Finance Minister Choi Sung-mok and Japanese Finance Minister Suzuki Toshifumi held a meeting on Wednesday during the G20 Spring Meeting, expressing concern about the depreciation of the won and yen. The two officials mentioned that they may take measures to address the volatility of exchange rates.

　　On Thursday, the Korean Composite Index rose by 0.45% at the opening to 2595.89 points, and as of the time of writing, the increase has expanded to 2.24% to 2642.02 points. Among them, Samsung SDI rose by nearly 3%, Hyundai Motor and Saelgroup rose by over 2%, while SK Hynix fell by over 1%.

　　Recently, Bank of Korea Governor Lee Chang-yeong said that the recent depreciation trend of the won may have gone too far, and the Bank of Korea is prepared to take necessary actions regarding exchange rate fluctuations. Lee emphasized that the central bank is ready to take stabilizing measures at any time and has sufficient resources to deal with the situation.

　　Ken Kobayashi, Chairman of the Japan Business Federation, called for coordination with other countries by Japanese financial authorities to intervene in the foreign exchange market to support the yen at a press conference on Wednesday. Meanwhile, Kazuo Momma, former Bank of Japan official responsible for monetary policy, also said on Wednesday that the Bank of Japan may be forced to respond to the yen's weakness, stating that “a weak yen is a problem for households and businesses.”

　　On Thursday, the yen rebounded, causing the short-term trend of the USD/JPY pair to fall by over 30 points, breaking below the key level of 154, with an intraday decline of 0.24%.

　　Image Source: Sankei News

　　Yesterday, the Philippine peso fell below the key level of 57 pesos for the first time since the end of 2022, exacerbating pressure on the country's central bank to intervene in the currency market. Today, the peso stopped falling and rebounded.

　　After the intervention by the Bank of Indonesia, the Indonesian rupiah rose slightly for the second consecutive day.

　　Since the beginning of the year, the Thai baht has depreciated by nearly 7% against the US dollar. Faced with the continued softening of the baht, the Bank of Thailand is trying to boost the baht through verbal intervention. The Bank of Thailand recently stated that it will continue to closely monitor fluctuations in the foreign exchange market.