Dollar Bulldozes Its Way Through Asian FX With Help From Yuan

The resurgent dollar cut a swath through global currencies Tuesday, weakening many through closely watched levels that forced some officials to step in to stem the losses, Bloomberg reported.

China’s move to weaken its daily reference rate for the yuan added to the selling pressure, with the Indonesian rupiah, Indian rupee and the South Korean won among the hardest 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%.

Geopolitical tensions and stronger-than-expected US retail sales 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 at the weekend added to the impetus for haven buying as conflict between the two countries entered a perilous new phase.

“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 Plc. “The move in Asian FX is being driven by a broadly stronger dollar, fueled 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.”

The dollar’s strength forced Bank Indonesia to step in to support the rupiah after the currency weakened past 16,000 per dollar for the first time in four years, as onshore markets reopen after a holiday that was more than a week long. South Korea’s foreign-exchange authorities warned of the risk of excessive one-sided currency moves on the economy after the won dropped to the closely watched psychological level of 1,400 per dollar for the first time since late 2022.

Malaysia’s central bank on Monday signaled that it stood ready to support the ringgit, which is hovering close to a 26-year low.

“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.

The Indian rupee slid to a record low while Malaysia’s ringgit is close to the lowest since 1998. The Taiwanese dollar declined to the weakest since 2016, while the Philippine peso weakened to 57 per dollar for the first time since November 2022. The MSCI EM Currency Index has fallen 1.8% this year.

Even the yen is under pressure with traders eyeing 160 per dollar as the next threshold. In Asian stocks, Korea and Taiwan led the declines, with their gauges slumping about 2.5% each.

Easing bets on Fed rate cuts suggest the battle against dollar strength isn’t going to end anytime soon. That has led to an increase in currency intervention across emerging markets, especially in Asia, as officials face increasing pressure 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 neighbors such as South Korea and Thailand, where China is the number one trading partner, but a suddenly weaker yuan may have a much wider effect.