"The US dollar is our currency, but it's your trouble" - as the US dollar continues to rise against the backdrop of the recent cooling expectations of the Federal Reserve's interest rate cuts, this famous quote from former US Treasury Secretary Connery over half a century ago seems to have once again become a major concern for many emerging market decision-makers
Many investors in the foreign exchange market have been paying attention to whether the Japanese government will intervene to prevent the yen, which has already fallen below the 153 mark, from further weakening. But in fact, many economies in emerging markets face no less exchange rate pressure than Japan.
Some locals say that the foreign exchange market has become a key battlefield, as the recent sharp rise of the US dollar has put enormous pressure on an increasing number of emerging economies to take intervention actions.
Market data shows that as investors continue to buy gold and the US dollar, the MSCI Emerging Markets Index has weakened for the third consecutive day last Friday, approaching a low for the year. Almost all 23 emerging currencies tracked by the industry fell on the same day, with the Hungarian forint and Chilean peso leading the decline.
Last week, the unexpected CPI data from the United States clearly suppressed industry bets on the Fed's interest rate cut, indicating that the global battle against the strong US dollar will not end soon. The increasingly tense situation in the Middle East between Israel and Iran may also lead to a further surge in market demand for safe haven against the US dollar.
In South Korea, Thailand, and Poland, local officials have recently expressed that they are closely monitoring currency fluctuations, and some have explicitly stated that intervention measures will be taken if necessary. The Indonesian government, on the other hand, directly ended up selling the US dollar to defend the trend of the Indonesian rupiah.
Marcella Chow, global market strategist at JPMorgan Asset Management in Hong Kong, said, "We are indeed seeing a significant amount of verbal intervention from different central banks. Given that the Federal Reserve seems unlikely to ease policy soon, Asian currencies may become even weaker, which suggests that these central banks may need more verbal intervention."
Intervention warnings are constantly ringing in the ears
At present, Thai decision-makers are undoubtedly facing a severe test in their efforts to support the Thai baht, which has fallen by about 6% this year. And their current approach is to use threatening intervention language to try to convince the outside world that the Thai baht can rise.
"The Monetary Policy Committee will continue to closely monitor fluctuations in the foreign exchange market," Thai central bank decision-makers said at a monetary policy meeting on April 10th. At this meeting, the Bank of Thailand, disregarding the wishes of Prime Minister Seth Thaksin, who emphasized the need to relax policies, decided to remain silent to help maintain exchange rate stability.
The Polish central bank reiterated at its latest policy meeting on April 4th that it may intervene to support the country's currency, the zloty. After announcing the maintenance of interest rates, policy makers at the Polish central bank stated that a stronger currency would help curb inflation.
South Korean central bank officials also stated that they are closely monitoring the trend of the Korean won after it further depreciated last week. Officials emphasized that the speech made by Bank of Korea Governor Lee Chang yong on the Korean won last Friday included verbal intervention terms.
Some countries have already taken action
In fact, mere verbal warnings may no longer be enough to help some emerging currencies resist the strong US dollar. A few central banks have actually taken direct action in the foreign exchange market
The Indonesian central bank has been continuously buying Indonesian rupiah recently to limit the decline of the local currency. Bank of Indonesia Governor Perry Waji recently stated that intervening and selling high-yield securities will be their main means of supporting the Indonesian rupiah this year.
The latest official intervention in Indonesia was on April 2nd, when the Indonesian rupiah fell to its lowest point in four years. From a fundamental perspective, the current difficulties faced by the Indonesian rupiah are not solely attributed to the strong US dollar: due to concerns about the new President Prabowo's spending plans, the Indonesian rupiah has also been under domestic pressure.
In South America, the Peruvian central bank's interest rate cut last week surprised economists. One reliance that enables it to take this step may also come from the intervention of the central bank. It is reported that the Peruvian central bank has been frequently selling the US dollar in recent months to support the Peruvian real. Local officials have previously stated that the purpose of intervention is to reduce currency fluctuations.
In addition, although the actions of the Bank of Israel are not primarily aimed at the US dollar, the Bank of Israel also unprecedented sold the US dollar to protect the Shekel after the Hamas attack in October last year.
Industry insiders have stated that many central banks currently facing the greatest intervention pressure are concentrated in Asia. Because in the past month, the weakness of Asian currencies against the US dollar has become particularly evident.
Paul Mackel, Global Head of Foreign Exchange Research at HSBC Holdings, said, "Asian central banks cannot relax their vigilance. Given that weak currencies often stimulate price pressures, this means that in reality, the 'last mile' of inflation is not only difficult for the United States, but also for many different economies."
Will the future still depend on the face of a strong US dollar?
Looking ahead, the fate of emerging market currencies is likely to mainly depend on the performance of the US dollar.
The safe haven position of the US dollar and higher than expected inflation data have driven the Bloomberg dollar index up more than 1.4% last week, the largest weekly increase since September 2022.
There are indications that the current policy outlook of the Federal Reserve is increasingly divergent from other global monetary authorities such as the European Central Bank. According to the Federal Reserve observation tool of the Chicago Mercantile Exchange, the probability of the Federal Reserve cutting interest rates in July is only about 50%. The European Central Bank hinted last week that it may lower interest rates as early as June, as inflation weakens.
Ned Davis Research Chief Economist Alejandra Grindal said: Based on these indicators, at least for now, the US dollar may continue to strengthen. Based on our current understanding, the likelihood of the Federal Reserve not taking (interest rate cuts) action first is increasing. From a historical perspective, when other major central banks, rather than the Federal Reserve, take the lead in lowering interest rates, the US dollar will strengthen.
The bullish sentiment towards the outlook for the US dollar has actually been clearly reflected in the position data. According to data from the Commodity Futures Trading Commission (CFTC) in the United States, as of the week ending April 9, asset managers, hedge funds, and other speculative market participants had a total net long position in the US dollar of approximately $17.5 billion. These non commercial traders have the most optimistic view of the US dollar since the fall of 2022.
"Compared to other economies with poor economic growth, the Federal Reserve is still in a comfortable position to remain stagnant, and we may see the US dollar continue to rise against other currencies, especially the euro," said Dominic Schnider, Global Head of Foreign Exchange and Commodities at UBS Global Wealth Management
Of course, it is worth mentioning that although there is currently almost no sign that the US dollar's rise is about to slow down, some analysts at least believe that now may be the appropriate time to start replenishing some of the previously hardest hit non US currencies.
David Chao, strategist at Jingshun Asset Management, said that the possibility of the Federal Reserve delaying interest rate cuts after the release of US inflation data in March has increased the continued unfavorable factors facing Asian currencies, but this may be an opportunity to buy risky assets in the region on dips.