Emerging Market Central Banks Take Action Against Rising Dollar
Central banks in emerging markets from Brazil to South Asia have been finding ways to offset the dollar’s rise.
According to a Bloomberg report, Governor Eli Remolona said on Friday that the Philippine Central Bank was closely watching the peso’s decline and intervening in currency markets. Indonesia has vowed to defend the rupiah (IDR) to stabilize markets, while Brazil said it spent $14 billion last week to shore up the real (BRL).
Developing economies are facing increasing pressure. India’s rupee and Brazil’s real have hit record lows, and South Korea’s won has fallen to a 15-year low. A weakening currency could worsen inflation and increase the cost of debt service for nations that rely on foreign borrowing.
Currency strategist Christopher Wong said fighting a strong dollar trend is difficult, and “intervention in such an environment can only slow the pace of currency depreciation.” Despite this, central banks may still need to use a mix of verbal and real intervention tools.”
Emerging market currencies have faced a steep quarterly decline
Source: Bloomberg
Since the end of September, the MSCI Emerging Markets Currency Index has fallen 3.3%, its biggest quarterly decline in two years.
This has compounded the challenges as the US Federal Reserve’s stance has taken a more cautious approach. This will lead to fewer interest rate cuts next year and heightened inflation concerns.
With a strong dollar, emerging market central banks are willing to take bold steps to keep their currencies from falling too far and avoid further economic damage. On Friday, South Korea said it will raise the limit that banks can hold in forward contracts to 50% of their foreign-exchange reserves.