Emerging-market currencies fell to a new low for the year as the dollar extended gains into a fifth day amid heightened geopolitical tensions, and after robust US data boosted bets the Federal Reserve will delay interest-rate cuts.
A key intervention from China — weakening its daily reference rate for the yuan — only served to ramp up the pressure with the Indonesian rupiah, Indian rupee and the South Korean won being particularly hit.
But the dollar impact was broader, with a global gauge of emerging-market currencies falling to fresh lows for the year. Asian stocks also extended their losses, with a benchmark of the region’s emerging-market equities sliding roughly 2%. The Stock Exchange of Thailand was closed for the Songkran holiday and will reopen on Wednesday.
The MSCI EM Currency Index dropped 0.2% on Tuesday to the lowest since December. The US currency got an extra boost in early trading after China moved to weaken the daily reference rate for the yuan after sustained dollar pressure.
The Thai baht was trading at 36.71 to the dollar, close to its 2024 low, in offshore markets on Tuesday afternoon Thailand time.
“Most Asian currencies will have to capitulate to the strength of the dollar,” said Mitul Kotecha, head of FX and EM macro strategy for Asia at Barclays.
“The move in Asian FX is being driven by a broadly stronger dollar, fuelled by rising US yields and intensifying market risk aversion. Weakness in the yen and the weaker China yuan fixing today add another layer of pressure on the currencies.”
Geopolitical tensions and US data suggesting the Federal Reserve will delay interest-rate cuts have helped the US currency extend gains into a fifth day. Iran’s attack on Israel added to the impetus for safe-haven buying as conflict between the two countries entered into a perilous new phase.
“The undesired mix of geopolitics, higher-for-longer US rates and volatility in the yuan and yen may continue to undermine sentiment in Asia ex-Japan currencies,” said Christopher Wong, a currency strategist at Oversea-Chinese Banking Corp in Singapore.
Stronger-than-expected US economic data has increased uncertainty about Fed rate cuts, suggesting the battle against dollar strength is not going to end anytime soon. That has led to an increase in currency intervention across emerging markets, especially Asia, as dollar strength puts pressure on officials to act.
Meanwhile, any weakening in China’s managed currency can have an outsized impact as it is seen as an anchor for its regional peers. Most under threat are the currencies of Asian neighbours such as South Korea and Thailand, where China is the number one trading partner and a suddenly weaker yuan may have a much wider effect.
Bank Indonesia stepped in to support the rupiah on Tuesday after the currency weakened past 16,000 per dollar for the first time in four years. The South Korean won dropped to the closely watched psychological level of 1,400 per dollar for the first time since late 2022, while the Malaysian ringgit is close to its lowest since 1998.
Malaysia’s central bank on Monday signalled that it stood ready to support the ringgit.
The MSCI EM Currency Index has fallen 1.8% this year.
The dollar’s strength and broader risk aversion resulted in Asian stocks extending their losses from Monday, with a benchmark of the region’s emerging-market equities sliding close to 2%. South Korea and Taiwan led the declines, with their gauges slumping about 2.5% each.