(Bloomberg) — From Brazil to South Korea, emerging-market central banks are forming a line of defense as a rising dollar pushes their currencies to multi-year lows.
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Bangko Sentral ng Pilipinas is watching the peso’s drop closely and has stepped up intervention in the currency market, Governor Eli Remolona said Friday. Brazil’s central bank has spent almost $14 billion in the past week to support the real while Bank Indonesia vowed to guard the rupiah “boldly” to build market confidence.
Authorities in developing economies are on the defensive as the greenback’s strength wreaks havoc across global markets, with South Korea’s won falling to the lowest in over 15 years while India’s rupee and the real crashed to all-time lows. A rapid decline in currencies risks worsening the impact of imported inflation for emerging markets, and may also increase the cost of servicing debt on foreign liabilities.
“It is hard to go against a strong USD trend,” said Christopher Wong, a currency strategist at Oversea-Chinese Banking Corp. in Singapore. “Intervention in such an environment can only slow the pace of currency depreciation. Despite that, central banks may still have to use a mix of verbal and actual intervention tools.”
The MSCI Emerging Markets Currency Index has fallen 3.3% since end-September to head for its biggest quarterly drop in two years. The move comes after the Federal Reserve forecast fewer interest-rate cuts next year and signaled that inflation concerns are back on the radar.
With the dollar expected to remain strong, policymakers in developing markets are taking action. South Korea said Friday it will ease the cap on banks’ foreign-exchange forward positions by 50% to boost inflows and address demand and supply imbalances in the local currency market. China’s central bank continued to support the yuan with its daily reference rate by setting it significantly stronger than the market’s forecast.
The pushback against a stronger dollar comes at a cost, with monetary authorities forced to dip into their foreign-exchange reserves to defend their currencies.
“The bullish dollar climb has been supported by the Fed’s tilt to be less dovish but the thinner liquidity in December can also create pronounced exaggerated moves,” said Alan Lau, an FX strategist at Malayan Banking Berhad in Singapore. During this period, central banks may keep trying to reduce the volatility in their currencies and prevent big swings, he added.
