(Bloomberg) — The resurgent dollar cut a swath through global emerging-market currencies Tuesday, weakening many through closely watched levels that forced some officials to step in to stem the losses.
China’s move to weaken its daily reference rate for the yuan added to the selling pressure, with the Indonesian rupiah, Indian rupee and the South Korean won among the hardest hit. But the dollar impact was broader, with a global gauge of emerging-market currencies falling to fresh lows for the year. Stocks also extended their losses, with a benchmark of emerging-market equities erasing their gains for the year.
The dollar’s strength forced Bank Indonesia to step in to support the rupiah after the currency weakened past 16,000 per dollar for the first time in four years, as onshore markets reopen after a holiday that was more than a week long. South Korea’s foreign-exchange authorities warned of the risk of excessive one-sided currency moves on the economy after the won dropped to the closely watched level of 1,400 per dollar for the first time since late 2022.
China Loosens Grip on Yuan by Weakening Fixing as Dollar Gains
“Pressure on EM currencies could last until we get clarity on the Fed’s plans,” said Rajeev De Mello, a global macro portfolio manager at GAMA Asset Management. “While the medium-term positive trend remains intact, the market will go through some turmoil before regaining a better footing.”
Attention will turn to Europe where currencies like South African rand, Polish zloty, Israeli shekel are facing pressure. Geopolitical tensions and stronger-than-expected US retail sales data suggesting the Federal Reserve will delay interest-rate cuts have helped the US currency extend gains into a fifth day.
Iran’s attack on Israel at the weekend added to the impetus for haven buying as conflict between the two countries entered a perilous new phase.
“Most EM currencies will have to capitulate to the strength of the dollar,” said Mitul Kotecha, head of FX and EM macro strategy for Asia at Barclays Plc. “In Asia, weakness in the yen and the weaker China yuan fixing today add another layer of pressure.”
The Indian rupee slid to a record low while Malaysia’s ringgit is close to the weakest since 1998. Malaysia’s central bank on Monday signaled that it stood ready to support the ringgit, which is hovering close to a 26-year low.
The Taiwanese dollar declined to the lowest since 2016, while the Philippine peso weakened to 57 per dollar for the first time since November 2022. The MSCI EM Currency Index has fallen 1.8% this year.
Even the yen is under pressure, with traders eyeing 160 per dollar as the next threshold. Stock gauges in Korea, Hong Kong and Taiwan slumped more than 2%.
Easing bets on Fed rate cuts suggest the battle against dollar strength isn’t going to end anytime soon. That has led to an increase in currency intervention across emerging markets, especially in Asia, as officials face increasing pressure to act.
Meanwhile, any weakening in China’s managed currency can have an outsized impact as it is seen as an anchor for its regional peers. Most under threat are the currencies of Asian neighbors such as South Korea and Thailand, where China is the number one trading partner, but a suddenly weaker yuan may have a much wider effect.
“The undesired mix of geopolitics, higher-for-longer US rates and volatility in the yuan and yen may continue to undermine sentiment in Asia ex-Japan currencies,” said Christopher Wong, a currency strategist at Oversea-Chinese Banking Corp. in Singapore.
–With assistance from Matthew Burgess, Hooyeon Kim and Shikhar Balwani.
(Updates to add analyst comment in fourth paragraph.)
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