U.S. election uncertainty, several Asian countries have taken protective measures to stabilize their currencies as the dollar gains strength, putting pressure on currencies across the region. Central banks in countries such as Indonesia and China have already intervened to maintain stability, while other regional powers, including South Korea and the Philippines, are closely monitoring the situation and may take action if necessary.
The catalyst for this market reaction is the unexpected resurgence of former President Donald Trump in key U.S. swing states, including Georgia and North Carolina. As Trump took early leads in these states, traders reacted by betting on “Trump trades,” which include anticipating a rise in the dollar’s value driven by protectionist policies. Trump’s prior presidency was marked by an “America First” economic strategy, which was often accompanied by tariffs and trade barriers that bolstered the dollar.
Bloomberg’s dollar index, a gauge tracking the currency’s performance, advanced over 1% as traders anticipated further dollar strength. This spike in the dollar’s value has sent ripples through Asian currency markets, weakening currencies such as the Indonesian rupiah, Chinese yuan, and Korean won. The dollar’s rally is also putting pressure on other emerging market currencies, such as the Mexican peso, which often mirrors fluctuations in Asian markets.
Among the first responders to this currency fluctuation was Bank Indonesia, which signaled its readiness to intervene in various financial markets. The bank aims to curb any excessive currency movements by intervening in the rupiah’s value, the non-deliverable forwards market, and the local bond markets. These measures reflect Indonesia’s commitment to maintaining stability in its financial sector, as the rupiah’s depreciation could lead to rising inflation and increased costs for imported goods, particularly oil.
Meanwhile, state-owned banks in China were observed selling substantial amounts of dollars onshore to bolster the yuan. China’s approach to currency management, particularly during times of external pressure, has traditionally involved direct intervention by state-owned banks, often directed by the People’s Bank of China. This action is intended to prevent excessive devaluation of the yuan, which could have broader economic implications, especially in the form of capital outflows and inflationary pressures on imports.
The dollar’s recent surge is largely attributed to speculation that Trump’s policies, if he returns to office, may reintroduce a wave of protectionism. This includes higher tariffs on imports and renegotiations of trade agreements, potentially limiting access to U.S. markets for some Asian economies. As the election results remain in flux, traders are betting that the dollar will strengthen further, mirroring the market’s reaction in 2016 when Trump was first elected president.
Economists argue that Trump’s “America First” approach could lead to increased demand for the dollar as companies and governments adjust to a potentially less open U.S. economy. This environment typically leads to a stronger dollar, placing pressure on emerging markets in Asia and Latin America, whose currencies often weaken against the dollar in times of uncertainty.
Traders and investors are closely monitoring South Korea and the Philippines, two economies that have previously taken measures to defend their currencies. South Korea’s won and the Philippine peso have been under pressure amid a strengthening dollar, prompting speculation that central banks in both countries may intervene if their currencies experience sharp declines.
According to Lemon Zhang, a currency strategist at Barclays Bank Plc, resistance is expected around the 1,400 mark for the USD/KRW (U.S. dollar to Korean won) pair. Zhang suggests that authorities may intervene if the won weakens beyond this point to maintain market stability.
Such interventions are not without precedent in South Korea, where the Bank of Korea has historically stepped in during periods of high volatility. In the Philippines, the Bangko Sentral ng Pilipinas (BSP) also has a track record of intervening in the currency markets to avoid excessive peso depreciation, as a weaker peso can lead to inflationary pressures on imported goods, affecting the broader economy.
Despite current currency pressures, Asian economies hold a significant shield against volatility: a cumulative $6 trillion in foreign exchange (FX) reserves. These reserves, built up over decades of trade surpluses and careful management, serve as a financial buffer that governments can deploy to stabilize their currencies. The combined FX reserves of countries such as China, Japan, and South Korea allow these economies to withstand sudden swings in the dollar’s value, minimizing the impact on domestic inflation and financial stability.
China alone holds over $3 trillion in FX reserves, providing ample room to manage the yuan’s value even amid a dollar rally. Japan, with the second-largest FX reserves in Asia, also has the capacity to step in if the yen experiences sharp declines, as it did in the early trading session Wednesday. Similarly, South Korea and Singapore hold substantial reserves that can be used to prevent excessive volatility.
However, these reserves are not limitless, and continuous intervention can deplete them. Consequently, most central banks prefer targeted interventions, stepping in only when market movements threaten financial stability or inflation targets.
The dollar’s upward momentum was felt throughout Asian markets on Wednesday, with every major Asian currency weakening against it. The Japanese yen and Singapore dollar led the declines, reflecting the extent of the dollar’s reach as investors flocked to safe-haven assets. In Japan, where the yen has faced downward pressure, authorities have signaled they are monitoring the situation, although the Bank of Japan has not yet announced any formal intervention plans.
Singapore, a major financial hub, saw its dollar decline amid heightened market uncertainty. The Monetary Authority of Singapore (MAS) manages the SGD within a specific trading band, and while MAS interventions are infrequent, sudden movements in the dollar could prompt action if the SGD strays too far from its targeted range.
The immediate pressure on Asian currencies reflects broader concerns about how a strong dollar might affect the region’s economic recovery. A high dollar exchange rate can exacerbate inflation by making imports more expensive, which is especially challenging for energy-importing countries like Japan, South Korea, and India. Rising costs for commodities such as oil could lead to increased prices domestically, putting additional strain on households and businesses alike.
For export-driven economies like China, Japan, and South Korea, a strong dollar also impacts competitiveness. As local currencies weaken, their goods become cheaper for U.S. buyers, potentially boosting exports. However, a prolonged period of currency weakness can increase the cost of servicing dollar-denominated debt, leading to greater financial strain in the long term.
