The strong US dollar has started the “harvest” mode again: emerging markets have started a “currency defense war”!

“The U.S. dollar is our currency, but it’s your trouble” – As the U.S. dollar has been rising against the backdrop of recent declines in expectations of a Federal Reserve interest rate cut, this famous quote from former U.S. Treasury Secretary Connally more than half a century ago seems to be coming back again. It has become a major problem for many policymakers in emerging markets

Many investors in the foreign exchange market have recently been paying attention to whether the Japanese government will intervene to prevent the yen, which has already fallen below the 153 mark, from weakening further. But in fact, in emerging markets, many economies face exchange rate pressures no less than Japan.

Some locals said the foreign exchange market has become a key battleground, as the dollar’s recent surge has put tremendous pressure on an increasing number of emerging economies to intervene.

Market data shows that as investors continue to buy gold and the US dollar, the MSCI Emerging Markets Index weakened for the third consecutive day on Friday, approaching the low of the year. Almost all of the 23 emerging currencies tracked by the industry fell on the day, with the Hungarian forint and Chilean peso leading the decline.

Last week, the U.S.’s unexpected CPI data significantly suppressed industry bets on the Federal Reserve’s interest rate cuts, indicating that the global battle against a strong U.S. dollar will not end soon. The growing tensions in the Middle East between Israel and Iran may also lead to a further surge in safe-haven demand for the U.S. dollar.

In South Korea, Thailand and Poland, local officials have said in recent days that they are paying close attention to currency fluctuations, and some have made it clear that they will take intervention measures if necessary. The Indonesian government directly “ended up” and defended the trend of the Indonesian rupiah by selling US dollars.

“Right now, we’re really seeing a lot of verbal intervention from different central banks,” said Marcella Chow, global market strategist at J.P. Morgan Asset Management in Hong Kong. “Asian currencies are likely to be even weaker now that the Fed seems unlikely to ease policy anytime soon,” This indicates that these central banks may need more verbal intervention.”

Intervention warnings are ringing

Currently, Thai policymakers are undoubtedly facing a severe test in their efforts to support the baht – which has fallen by about 6% this year. What they are doing now is to use threats of intervention to try to convince the outside world that the baht can rise.

“The (Monetary Policy) Committee will continue to pay close attention to foreign exchange market fluctuations,” Bank of Thailand policymakers said at the monetary policy meeting on April 10. At the meeting, the Bank of Thailand decided to remain on hold, defying the wishes of Prime Minister Settar Thasa Thakura, who stressed the need to ease policy, to help maintain currency stability.

The Central Bank of Poland reiterated at its latest policy meeting on April 4 that the bank may intervene to support the country’s currency, the zloty. Polish central bank policymakers said a stronger currency would help curb inflation after announcing they were keeping interest rates unchanged.

Bank of Korea officials also said they were paying close attention to the won’s trend after the won depreciated further last week. Relevant officials emphasized that Bank of Korea Governor Lee Chang-yong’s speech on the Korean won on Friday contained verbal intervention terms.

Some countries have already “taken action”

In fact, mere verbal warnings may no longer be enough to help some emerging currencies resist the strong dollar. A few central banks have actually taken direct “actions” in the foreign exchange market…

Indonesia’s central bank has recently been buying Indonesian rupiah to limit the decline of the local currency. Bank Indonesia Governor Peri Waji recently said intervention and the sale of high-yield securities would be their main means of supporting the rupiah this year.

Indonesia’s last official intervention was on April 2, when the rupiah fell to its lowest point in four years. From a fundamental point of view, the current difficulties faced by the Indonesian rupiah are not only due to the strong US dollar: due to concerns about the new President Prabowo’s spending plans, the Indonesian rupiah has also been under domestic pressure.

In South America, Peru’s central bank surprised economists last week with an interest rate cut. One of the factors that enabled it to take this step may also come from the intervention of the central bank. It is reported that the Peruvian central bank has been selling U.S. dollars frequently in recent months in order to support the Peruvian Sol. Local officials have said in the past that the intervention was aimed at reducing currency volatility.

In addition, although the Bank of Israel’s actions were not primarily directed at the U.S. dollar, after the Hamas attack in October last year, the Bank of Israel also sold U.S. dollars in an unprecedented manner to protect the shekel.

Industry insiders said that many central banks currently facing the greatest pressure to intervene are concentrated in Asia. Because over the past month, Asian currencies have been particularly weak against the US dollar.

Paul Mackel, global head of foreign exchange research at HSBC Holdings, said, “Asian central banks cannot let down their guard. Given that weak currencies tend to stimulate price pressures, this means that in fact the ‘last mile’ of inflation is difficult not only for the United States, but for many The same goes for different economies.”

Will the future still depend on the “face” of a strong U.S. dollar?

Looking ahead, the fate of emerging market currencies is likely to remain largely determined by the performance of the U.S. dollar.

The dollar’s safe-haven status and higher-than-expected inflation data have pushed the Bloomberg Dollar Index up more than 1.4% last week, the largest weekly gain since September 2022.

There are signs that the current policy outlook of the Federal Reserve is increasingly diverging from that of other global monetary authorities such as the European Central Bank. CME Group’s FedWatch tool shows that the probability of the Fed cutting interest rates in July is only about 50%. The European Central Bank signaled last week that it could cut interest rates as early as June amid softening inflation.

Alejandra Grindal, chief economist at Ned Davis Research, said: Judging from these indicators – at least for now, the dollar is likely to continue to strengthen. Based on what we know now, it’s increasingly likely that the Fed won’t act first. Historically, the dollar has strengthened when other major central banks take the lead, rather than the Fed.

The bullish sentiment on the outlook for the US dollar has actually been clearly reflected in the position data. Data from the U.S. Commodity Futures Trading Commission (CFTC) shows that asset managers, hedge funds and other speculative market participants had a total net long position in the U.S. dollar of about $17.5 billion in the week ended April 9. These non-commercial traders have The view on the U.S. dollar is the most bullish since fall 2022.

Dominic Schnider, global head of foreign exchange and commodities at UBS Global Wealth Management, said: “The Fed is still in a comfortable position to stay on hold compared to other economies with poorer growth, and we are likely to see the dollar continue to move higher against other currencies, Especially against the euro.”

Of course, it is worth mentioning that although there are currently few signs that the dollar’s gains are about to slow down, some analysts at least believe that now may be the right time to start covering some of the non-U.S. currencies that have suffered the most.

David Chao, a strategist at Invesco Asset Management, said that the possibility of the Federal Reserve delaying an interest rate cut after the release of U.S. inflation data in March has increased the continued headwinds facing Asian currencies, but this may be a bargain to buy the region’s risk assets. Opportunity.

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