Only Asia’s central bankers know what’s next for the dollar
|Date | 25-01-2018 - 12:19 PM||Article Type | Stock Markets||Region | World|
If Asia’s currencies aren’t allowed to appreciate, the dollar could find a floor soon
By ANNEKEN TAPPE
Whether the U.S. dollar will recover from its sharp drop on Wednesday could to a large degree be decided by Asia’s central banks, which keep a close grip on local currencies and their appreciation against the buck.
The ICE U.S. Dollar Index DXY, -0.26% dropped 1% on Wednesday, adding to its already weak performance after Treasury Secretary Steven Mnuchin’s comments at the World Economic Forum in Davos were interpreted to favor a weak greenback.
A weaker dollar could help the U.S. from a trade perspective, because it makes U.S. exports cheaper abroad. But as the greenback is weakening, its rivals are strengthening.
Much of the U.S. trade deficit that has been targeted by the administration of President Donald Trump’s protectionist rhetoric has been geared toward Asia, where central banks’ close watch is motivated by a desire to keep the export engine running for their own economies.
The trading range of the Chinese yuan USDCNY, -0.6045% versus the dollar, for example, is tightly bound and monitored by the People’s Bank of China. Given Wednesday’s trading action, when the yuan appreciated 0.5% against buck, the question for the PBOC is now whether it can maintain its basket peg against the buck even if that means the yuan will strengthen, said Brad Setser, senior fellow at the council of foreign relations.
“If China does not up the ante on trade, risk should trade OK, and the dollar will trade weaker against most currencies,” suggested Deutsche Bank macro strategist Alan Ruskin. “If China responds in a way that is risk-negative, emerging markets will start to get hit, and the dollar weakness will get concentrated against the G10 majors.”
It is also notable that China is one of the biggest holders of U.S. government bonds, so a depreciating dollar could cost it, market participants said.
Other export-strong Asian nations, however, such as South Korea and Taiwan, don’t have official currency pegs. Yet their central banks have intervened in the past to smooth their exchange rates, market participants said.
For the South Korean won USDKRW, -0.40% , for example, this would typically happen when the dollar‘s level would be at around 1,100 won, Setser said. For reference, the buck last bought 1,065 won, up 0.8% on Wednesday.
“Fears of intervention were underpinned by the Finance Ministry asking Korean policy banks and state-owned entities to refrain from foreign bond sales to boost appetite for the dollar,” said Sue Trinh, head of Asia FX strategy at RBC, in a note.
“Asian central banks keep a close eye on their currencies and tend to intervene when they reach key levels,” Setser said, “and we are at those key levels now for both Korea and Taiwan.”
“Taiwan’s central bank’s FX department director-general Harry Yen said Tuesday that the Taiwan dollar exchange rate in principle is determined by market forces but the central bank will step in to maintain an orderly market if irregular factors lead to excessive volatility and disorderly movements,” said Qi Gao, EM Asia currency strategist for Scotiabank.
The New Taiwan dollar USDTWD, -0.1443% rose 0.4% on Wednesday, when one greenback bought 29.1160 Taiwanese dollars.