A stronger US dollar has been weighing on Asian currencies for the past few weeks, sparking inflationary pressures across the region.
Analysts expect Asian currencies to remain weaker against the greenback as upbeat economic data has spurred speculation that the US Federal Reserve may not cut interest rates anytime soon. The US Bureau of Labor Statistics said on April 5 that nonfarm payrolls in the nation increased by 303,000 in March, indicating a stronger labor market and positive economic outlook.
“The devaluation of Asian currencies is intricately linked to the tightening of global monetary policies,” said Deniz Istikbal, an economic researcher at the Foundation for Political, Economic and Social Research, or SETA, a think tank based in Ankara, Turkiye.
He noted that both the Fed and the European Central Bank had hiked interest rates to “levels unseen in the past twenty-five years”, leading to capital outflows from developing Asian economies and pulled down currencies in the region.
Sanjay Mathur, chief economist for Southeast Asia and India at ANZ Research, said the weakness in Asian currencies is “broadly being driven by the strength of the US economy which has resulted in delayed rate cut expectations and a stronger dollar by implication”.
The Malaysian ringgit and the Thai baht are among the hardest hit, falling to historic lows in the past few weeks. The ringgit slid to 4.7965 against the US dollar on Feb 20, its weakest level since the 1998 Asian financial crisis. The Thai baht has depreciated by 7 percent since January.
The Indonesian rupiah fell to a four-year low of 15,963 against the dollar on April 1, pushing the central bank to intervene in the currency market. The Reserve Bank of India, India’s central bank, has likewise stepped in when the rupee hit a record low on March 27 owing to higher demand for imported crude oil
The Indonesian rupiah fell to a four-year low of 15,963 against the dollar on April 1, pushing the central bank to intervene in the currency market. The Reserve Bank of India, India’s central bank, has likewise stepped in when the rupee hit a record low on March 27 owing to higher demand for imported crude oil.
Mathur said the weaker currencies are boosting inflation levels in the Asian region, as a stronger dollar means that imported food and fuel will cost more. But he said that prices overall will be reined in by subdued domestic demand in Asia. “It is unlikely that corporates can pass on increases in input costs to end-consumers,” he said.
A stronger US dollar usually bodes well for commodity exporting countries like Indonesia, Malaysia, Thailand and Vietnam. But such gains will be limited by a decline in global demand, according to Istikbal of SETA.
“Moreover, currency depreciation negatively affects both society and government by disrupting price stability. Currencies losing value wield significant influence across various domains, ranging from elections to bureaucratic procedures,” he said.
Saktiandi Supaat, head of forex research at Kuala Lumpur-based Maybank, said the weaker ringgit is boosting prices of imported goods and services and affecting the purchasing power of Malaysians when travelling. But he said the weaker local currency will ensure that Malaysian exports are cheaper than other countries’ domestically priced exports and “ensures our export outlook remains supported”.
Malaysia’s inflation rose by 1.8 percent in February on higher housing, utilities and transportation costs. Indonesia's inflation rose to 3.05 percent in March, while India’s inflation increased by 5.09 percent in February due to higher food prices.
In Thailand, consumer price index fell by 0.47 percent, marking its sixth month of negative inflation, owing to the government’s fuel subsidies. But Prime Minister Srettha Thavisin said negative inflation is a sign of economic weakness, and has urged the Bank of Thailand (BOT) to ease interest rates to stimulate the economy.
Saktiandi said the ringgit is among the “most undervalued regionally” and as such the Malaysian currency can “potentially see good gains upon a turn in the external environment”. He is also optimistic that the ringgit will be supported by a rosy economic outlook, with Malaysia’s GDP seen growing by 4.4 percent this year, helped by increased tourism and electronic exports revenues.
He is likewise sanguine on the prospects of the South Korean won, citing the recovery of the chip cycle and electronics demand as a key driver for the currency’s strength in 2024. “The global chip cycle has bottomed and coupled with increased exuberance over artificial intelligence, could potentially drive outperformance for the South Korean won with potential boosts to both the economy and trade,” Saktiandi said.
But Saktiandi said the Thai baht is “facing a whole slew of headwinds both domestically and externally”. He said the BOT may cut interest rates “given the pressure they face from the government to ease, due to the weak economy”.
“The (Thai) economy remains weak amid concerns on whether tourist numbers and consumption this year can see sufficient growth,” he said.
Srettha said in an April 7 interview with Reuters that the BOT, the central bank, should cut key interest rate by at least 25 basis points this week and that the government will launch a 500 billion baht fiscal stimulus scheme through a ‘digital wallet’ program.
Srettha will chair a meeting on April 10 to finalize details of the digital wallet program that is scheduled to be rolled out by the fourth quarter of the year.
Srettha said Thailand’s GDP might have expanded by less than 1 percent in the first quarter. The nation is yet to unveil the official first quarter growth data.
