Central banks in Asia are facing a serious challenge: the rise of the US dollar

Central banks in Asia will face a catch 22 in 2025.

The US dollar’s relentless rise has seen Asian currencies such as the Japanese yen, South Korean won, Chinese yuan and Indian rupee fall to multi-year lows against the greenback.

While a cheaper currency could in principle make exports more competitive just as President-elect Donald Trump threatens to impose tariffs, central banks in Asia will need to gauge its impact on imported inflation and prevent speculative bets on continued weakness in their currencies, which could complicate policy development. , analysts note.

Following Trump’s victory in the 2024 presidential election, the U.S. dollar has risen sharply, gaining about 5.39% since the state’s Nov. 5 election.

One of the reasons for the strengthening of the US dollar is the policies that Trump promised during the election campaign, including tariffs and tax cuts that see economists to be inflationists.

Federal officials at their December meeting raised concerns about inflation and the impact President-elect Donald Trump’s policies could have, indicating they will move more slowly to cut interest rates amid uncertainty, minutes released Wednesday showed.

A reassessment of the Fed’s monetary policy outlook widened the yield gap between US and some Asian bonds.

That interest rate differential has dampened the appeal of lower-yielding assets, sending major Asian currencies lower and prompting some central banks, including the Bank of Japan and the Reserve Bank of India, to intervene.

James Ooi, market strategist at online brokerage Tiger Brokers, told CNBC that a strong U.S. dollar will make it more difficult for Asian central banks to manage their economies.

A stronger U.S. dollar is likely to “create problems for Asian central banks, increasing inflationary pressures from higher import costs and straining their (central banks’) foreign reserves as they try to prop up their currencies with interventions,” Ooi told CNBC by e-mail.

“When a country is struggling with high inflation and currency depreciation, cutting interest rates to stimulate economic growth may be counterproductive,” Oi added.

China’s onshore yuan hit a 16-month low of 7.3361 on Jan. 7 under pressure from rising U.S. Treasury yields and a stronger dollar.

A weaker yuan is supposed to make Chinese exports more competitive and hopefully spur growth in Asia’s largest economy.

But Lorraine Tan, director of Asia equity research at Morningstar, said a stronger U.S. dollar would limit the People’s Bank of China’s ability to cut interest rates without risking more capital outflows and help the domestic economy gain more flexibility in monetary policy. .

Since then, China has been struggling to prop up its economy last Septemberwith several stimulus measures including lower interest rates and support for the stock and real estate markets.

Most recently, the country expanded a consumer exchange scheme aimed at stimulating consumption equipment upgrades and subsidies.

“Having said that, fiscal spending needs to increase to sustain China’s growth,” Tan added.

This sentiment was echoed by Ken Peng, head of investment strategy for Asia Pacific at Citi Wealth. He said the Chinese government should issue more long-term bonds to finance economic stimulus rather than cut rates.

“(China) does not need to do more monetary policy. Therefore, it should not be a matter for NBK. That should be a matter for (a) Treasury (Ministry of Finance),” Peng said.

Also, in a world of often zero-sum export competitiveness, the pronounced weakness of the renminbi could make it difficult for economies elsewhere in Asia to make their goods and services more attractive to foreign buyers.

Citi Wealth said in its 2025 forecast report that a sharp depreciation of the Chinese currency could hurt economies that directly compete with or export to China, such as South Korea, Taiwan and other Southeast Asian countries.

Bank of Japan spent more than 15.32 trillion yen ($97.06 billion) to strengthen the currency through 2024 after the yen fell to a multi-decade low in July, hitting a low of 161.96.

Despite this, the currency stands at around 158 to the dollar, which is the weakest since the July lows.

Japanese financial officials have repeatedly warned against “one-sided” and “volatile” yen movements, most recently on January 7.

To be sure, a strong dollar can partially affect the Bank of Japan’s goals.

Inflation in Japan, which has battled deflation for decades, has exceeded the Bank of Japan’s 2% target for 32 consecutive months. The The BOJ recognized that the weakness of the yen could lead to higher imported inflation.

The challenge would be to keep prices and wages from rising faster than a level that satisfies the Bank of Japan.

Morningstar’s Ten said the dollar’s resilience added pressure on the Bank of Japan to raise rates to support the yen and reduce inflation risks.

In South Korea, its central bank recently stepped in to support the won, according to a Yonhap report on Jan. 6. Although the specific amount was not disclosed, it was enough to trigger the country’s foreign exchange reserves will fall to a five-year low.

It has depreciated steadily against the dollar since Trump’s election victory, reaching around $1,476 in December, its weakest level since 2009.

The Bank of Korea appeared to prioritize boosting domestic growth despite a weakening won abroad, with the central bank an unexpected reduction of 25 basis points at the last meeting in November.

“While exchange rate volatility has increased… pressures on economic growth have increased. Therefore, the Council considered it appropriate to further reduce the base rate and mitigate the risks of economic downturn,” the statement said. .

All these measures, however, were clouded by uncertainty when President Yoon Suk-yeol declared and then lifted martial law in early December, followed by impeachment.

BOK convened an emergency meeting on December 4 promised to provide “sufficient liquidity” until financial and currency markets stabilize. These measures will be in effect until the end of February.

India is the latest among the major Asian currencies to see Rs On January 8, it fell to a record low of 85.86, due to pressure from a strong dollar and selling by foreign portfolio investors in October and November.

India is grappling with inflation, which breached the RBI’s upper limit of 6% in October at 6.21%, although it has since eased.

This comes at a time when the country is facing a slowdown in growth, similar to India latest GDP readings was 5.4% in the second fiscal quarter ended in September, missing expectations and marking the lowest level since the last quarter of 2022.

In the majority recent monetary policy meeting the RBI kept rates at 6.5% in December, with two board members voting in favor of a 25 basis point cut.

If India decides to cut rates to stimulate growth – leading to a weaker rupee – the RBI will be well equipped to deal with a potential sudden outflow of foreign funds and any sharp fall in the rupee.

Citi Wealth said in its 2025 forecast report that “the central bank’s large foreign exchange reserves have brought greater stability to the Indian rupee.”

Citi’s Peng also describes the rupiah as “one of the most stable currencies in the world,” adding that “the only currencies that are less volatile than the Indian rupee are pegged currencies like the Hong Kong dollar. And so this should come as a relief to many foreign investors who may be interested in this market.”