In Asia, US dollar’s growing strength gives rise to stability concerns, suspected rate intervention

In Asia, US dollar’s growing strength gives rise to stability concerns, suspected rate intervention
In Asia, US dollar’s growing strength gives rise to stability concerns, suspected rate intervention

The US dollar index has risen by more than 4 per cent since the start of the year, triggering alarm bells among central banks in Asia that are running significant trade deficits with the US.

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In mid-April, finance officials from the US, Japan and South Korea agreed to “consult closely” on foreign exchange markets, acknowledging concerns from Tokyo and Seoul over their currencies’ recent sharp declines.

Japan’s finance minister, Shunichi Suzuki, said last month that Tokyo would not rule out measures to deal with excessive volatility in the foreign exchange market, adding that it was important for currencies to move stably, reflecting fundamentals.

Analysts suspect Japanese authorities have stepped into the foreign exchange market twice this week to prevent sharp and economically weakening declines in the yen, but there has been no official confirmation of this taking place.

In contrast, over the past few months, the People’s Bank of China has kept the onshore daily fixings of the yuan strong relative to survey expectations, maintained benchmark lending rates, and also managed offshore yuan liquidity – all of which pointed to its “defensive” stance in yuan exchange rates, the Bank of America said last week.

Exchange-rate stability… is part of the mandate of the PBOC

Julian Evans-Pritchard, Capital Economics

“China has always been less ideologically committed to having a free-floating exchange rate than Japan and Korea,” Julian Evans-Pritchard, head of China economics at Capital Economics, said on Friday. “It’s much more willing to step in to target a specific exchange rate.

“Exchange-rate stability is something they value for their own sake, and it is part of the mandate of the PBOC.”

China will step up support for the economy with prudent monetary and proactive fiscal policies, including interest rates and reserve requirement ratiosthe Politburo said on Tuesday.

Larry Hu, head of China economics at Macquarie Group, said the message from the Politburo suggested that a policy rate cut was not imminent, as the PBOC is making currency stability its top priority.

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