Emerging-markets central banks battle a surging dollar

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.

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 $17 billion in the past week to support the real, while Bank Indonesia vowed to guard the rupiah “boldly” to build market confidence. In Europe, Hungary’s central bank joined the trend, raising the interest rate on its foreign-currency swap tender to calm markets.

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 3.1% since end-September and is heading for its biggest quarterly drop in two years, led by the real, Hungarian forint and the Chilean peso. The moves come after the Federal Reserve forecast fewer interest-rate cuts next year and signaled that inflation concerns are back on the radar.

The index gained on Friday as the greenback plunged after a gauge of US inflation cool to the slowest pace since May last month.

Still, traders say the dollar will remain strong, and 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.

But not all the losses in developing-market currencies have been due to the dollar’s strength. The real has came under pressure on concerns about Brazil’s deficit after President Luiz Inacio Lula da Silva watered down a fiscal-austerity plan by adding a series of tax-relief measures for the poor. The Hungarian forint has been weakening in the past month as geopolitical risks fueling outflows from riskier assets amplified domestic economic headwinds.

Short Bets

The declines in emerging markets have fueled a tide of bearish bets, with some hedge funds wagering that more losses will accrue when President-elect Donald Trump’s proposed tariff policies kick in. Broad Reach Investment Management LLP is shorting the Mexican peso, along with currencies in North Asia, the Middle East and Eastern Europe, said Chief Executive Officer Bradley Wickens.

Developed nations are also feeling the heat. Japan ramped up its warnings against currency speculation Friday after the yen slid to a five-month low, with Finance Minister Katsunobu Kato cautioning that authorities will take appropriate action if there are excessive moves in the foreign-exchange market.

But 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.