Zimpapers Logo

The surge in the dollar has set Asian currencies on course for their worst quarter since the 1997 financial crisis and created a dilemma for central bankers.

Policy makers already grappling with the fastest inflation in decades now face stark choices: forcefully raise borrowing costs to defend currencies and risk hurting growth, spend reserves that took years to build to intervene in foreign exchange markets, or simply step away and let the market run its course.

The Bloomberg JPMorgan Asia Dollar Index is poised for a 4,5 percent drop this quarter, the steepest since the crisis pummelled currencies almost 25 years ago. 

Central banks in the region have lagged emerging-market peers in raising rates as they seek to boost the recovery from the pandemic, and that more patient policy stance is weighing on their currencies as the Federal Reserve pushes ahead with big hikes.

“Central banks are thrust into a difficult position to tighten, even as the recovery from the pandemic is not yet complete and with the spectre of a US recession ahead,” said Eugenia Victorino, head of Asia strategy at Skandinaviska Enskilda Banken AB in Singapore. 

“Complicating the picture is the strong greenback, which adds to the pressure to tighten as weak currencies exacerbate imported inflation.”

South Korea’s won is set for its largest monthly decline in 11 years, while the Philippine peso is headed for its worst quarter in 14 years. In India, the central bank is fighting on several fronts to slow the rupee’s decline to fresh records.

Meanwhile, the yen, which is not part of the index, has lost 11 percent of its value against the dollar since the end of March amid a growing yield differential with the US as the Bank of Japan sticks to its ultra-easy monetary policy. – Bloomberg