A man looks at the window of a currency exchange office showing rates of various currencies against the Japanese yen, on a street in central Tokyo, April 29, 2024.
Richard A. Brooks | Af | Getty Images
Central banks in Asia will face a catch-22 in 2025.
The continued rise of the US dollar has pushed Asian currencies such as the Japanese yen, South Korean won, Chinese yuan and Indian rupee to multi-year lows against the dollar.
While a cheaper currency could in principle make exports more competitive as President-elect Donald Trump threatens to impose tariffs, central banks in Asia would need to assess its impact on imported inflation and avoid speculative bets on the continued weakness of their currencies, which could complicate shaping politics, say analysts.
The US dollar has appreciated sharply since Trump won the 2024 presidential election, rising around 5.39% since the November 5 elections in the United States.
One reason for the US dollar's strength is the policies Trump promised during the campaign, including tariffs and tax cuts, which they see economists consider it inflationary.
Federal officials at their December meeting expressed concern about inflation and the impact that President-elect Donald Trump's policies might have, according to Wednesday's minutes, pointing out that they would be slower to cut interest rates because of the uncertainty.
The Fed's reassessment of its monetary policy outlook has widened the yield gap between U.S. bonds and several Asian bonds.
This interest rate differential has dimmed the attractiveness of lower-yielding assets, sending major Asian currencies tumbling and prompting some central banks, including the Bank of Japan and the Reserve Bank of India, to intervene.
James Ooi, market strategist at online broker 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 will likely “create challenges for Asian central banks by increasing inflationary pressures through higher import costs and straining their (central banks') foreign exchange reserves if they try to support their currencies through interventions,” Ooi told CNBC in an email.
“If a country is struggling with high inflation and currency depreciation, lowering interest rates to boost economic growth may be counterproductive,” Ooi added.
On January 7, the onshore Chinese yuan hit a 16-month low of 7.3361 under pressure from rising U.S. Treasury yields and a stronger dollar.
A weaker yuan would supposedly make Chinese exports more competitive and hopefully spur growth in Asia's largest economy.
However, Lorraine Tan, director of equity research for Asia at Morningstar, said a stronger US dollar would limit the People's Bank of China's ability to cut interest rates without the risk of increased capital outflows, and would also help the domestic economy gain greater monetary flexibility.
Since then, China has struggled to support its economy in September last yearcomprising a range of stimulus measures, including interest rate cuts and support for stock and property markets.
The country recently expanded its consumer trade program aimed at boosting consumption equipment modernization and subsidies.
“That said, fiscal spending must increase to support China's economic growth,” Tan added.
This view was shared by Ken Peng, head of Asia-Pacific investment strategy at Citi Wealth. He said the Chinese government should issue more long-term bonds to finance economic stimulus instead of lowering interest rates.
“(China) no longer needs to conduct monetary policy. So it shouldn't be a PBOC issue. It should be (a) matter for the Ministry of Finance (Ministry of Finance),” Peng said.
Moreover, in an often zero-sum world of export competitiveness, the yuan's apparent weakness could make it more difficult for other Asian economies to make their products and services more attractive to foreign buyers.
Citi Wealth, in its 2025 Outlook report, said 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 over 15.32 trillion yen ($97.06 billion) to strengthen the currency over 2024, after the yen fell to multi-decade lows in July, reaching a low of 161.96.
Still, the currency remains at around 158 against the dollar, its weakest level since July's lows.
Japanese financial officials have repeatedly warned against “unilateral” and “volatile” moves in the yen, most recently on January 7.
Certainly, a strong dollar may partially support the BOJ's goals.
After decades of struggling with deflation, Japan's inflation has remained above the BoJ's 2% target for 32 consecutive months. The BOJ admitted that a weakening yen could lead to an increase in imported inflation.
The challenge would be to ensure that prices and wages do not rise faster than the level satisfactory to the BoJ.
Morningstar's Tan said dollar strength is increasing pressure on the BOJ to raise interest rates to support the yen and ease inflation risks.
In South Korea, its central bank recently intervened to support the win, according to a Jan. 6 Yonhap report. While the specific amount was not disclosed, it was enough to cause confusion the country's foreign exchange reserves will fall to their lowest level in five years.
The won has steadily depreciated against the dollar since Trump's election victory, reaching around 1,476 against the dollar in December, its weakest level since 2009.
The Bank of Korea appears to have prioritized stimulating domestic growth despite the weakening win against the central bank introducing an unexpected cut of 25 basis points at its last meeting in November.
“Although exchange rate volatility has increased… downward pressure on economic growth has intensified. “The Council therefore considered it appropriate to further reduce the base rate and mitigate the downside risks to the economy,” it said in its statement. .
But all of these measures were overshadowed by uncertainty when President Yoon Suk Yeol declared and then lifted martial law in early December and was subsequently impeached.
On December 4, the BOK convened an extraordinary meeting pledged to provide “sufficient liquidity” until the financial and currency markets stabilize. These measures will be valid until the end of February.
The last of the major Asian currencies is India to record rupee fell to a record low of 85.86 on January 8, due to pressure from the strong dollar and sales by foreign portfolio investors in October and November.
India has been grappling with inflation, which breached the RBI's upper tolerance limit of 6% in October to 6.21%, although it has moderated since then.
This comes at a time when the country is facing a slowdown in growth, as is the case with India latest GDP reading reaching 5.4% in the fiscal second quarter ending in September, missing expectations and reaching its lowest level since the last quarter of 2022.
At his most recent monetary policy meeting in December, the RBI kept interest rates at 6.5% in a split decision, with two board members voting for a 25 basis point cut.
Should India decide to cut interest rates to boost economic growth – which would weaken the rupee – the RBI is well placed to deal with a potential sudden outflow of foreign funds and any sharp fall in the rupee.
In its 2025 Outlook Report, Citi Wealth said that the central bank's “large foreign exchange reserves have ensured greater stability for the Indian rupee.”
Peng Citi also describes the rupee as “one of the most stable currencies in the world” and adds that “the only currencies that are less volatile than the Indian rupee are peg currencies such as the Hong Kong dollar. Therefore, this should bring relief to many. foreign investors who may be interested in this market.”