The rise of the US dollar raises concerns as China and Japan escalate foreign exchange rate pressures

(Bloomberg) — The renewed advance in the US dollar has sent Asian currencies to multi-month lows and kept the euro under pressure, while prompting authorities in Japan and China to step up defense of their beleaguered exchange rates.

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Japan on Wednesday issued its strongest warning in weeks against a rapid depreciation of the yen, with its chief currency official saying the country was ready to take action amid speculative market moves. Soon after, China’s central bank provided the strongest guidance ever regarding its daily reference rate for the yuan, as the managed currency weakened to a level not seen since 2007.

Both currencies have been pressured by a broad-based dollar strength over the past few months. The yen has fallen about 8% against the dollar since mid-July, while the yuan has fallen more than 6% since May.

Signs of resilience in the US economy are convincing some traders that the Fed will keep interest rates high for a while longer. That helped lift the Bloomberg Spot Dollar Index by about 5% since its lowest level in July, while a measure of Asian currencies fell to its lowest level since November. Elsewhere, the euro and sterling fell to their weakest levels since June, on the back of the view that central banks in the eurozone and the UK may need to cut interest rates faster than the Fed as their economies suffer from the impact of higher borrowing costs.

For policymakers in Asia – who have spent the past year burning their reserves to prop up local currencies – it means returning to the battlefield to confront the bears.

“The prospect of higher US interest rates for a longer period of time renews pressure, and investors will be wary,” said Vijay Kannan, a strategist at Societe Generale in Singapore. He added that emerging Asian countries would be more vulnerable to a stronger dollar, given lower interest rates in the region and greater exposure to weaker growth prospects in China.

Rising oil prices have also raised concerns about rising inflation, a move that undermines expectations that Asian central banks have raised interest rates and hurt the attractiveness of local currency bonds. Bonds in Indonesia and Thailand are seeing outflows this month.

The poor economic outlook for China, which is built on disappointing data for several months, is also affecting sentiment on emerging market currencies.

The yen and yuan are among the worst performing Asian currencies this year. And while Japan has stopped short of using more aggressive tools to prop up its currency, China has already sought to boost the yuan by asking state-owned banks to sell dollars while tightening liquidity abroad to pressure short currency bets.

Similar currency defense measures exist elsewhere in Asia. Taiwan’s foreign exchange reserves fell in August for the first time in almost a year, as the monetary authority intervened in the market. In Thailand, the central bank warned that rapid movements in the baht would lead to intervention.

However, doubts remain about whether these measures will be a game-changer in the absence of a less hawkish Fed or a recovery in the Chinese economy. Morgan Stanley turned bearish for emerging market currencies this week, saying that currencies in Asia will be exposed to slowing growth in China.

Alvin T. said: Tan, Head of Emerging Markets Currency Strategy at RBC Capital Markets: “The immediate impact of a stronger US dollar is that it will prevent most Asian central banks from easing monetary policy, for fear of exacerbating currency weakness.” Singapore.

The Bloomberg Dollar Index rose as much as 0.1% on Wednesday. The US currency was stable against the euro, and fell by 0.2% against the yen.

–With assistance from Ruth Carson, Neha D’Silva, Naomi Tagitsu, and Vasilis Karamanis.

(Updates with analyst comment and details)

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