A man looks in the window of a money changer showing the rate of various currencies against the Japanese yen, along a street in central Tokyo on April 29, 2024.
Richard A. Brooks | Afp | Getty Images
Central banks in Asia face a catch-22 in 2025.
A relentless rise in the U.S. dollar has sent Asian currencies such as the Japanese yen, South Korean won, Chinese yuan and the Indian rupee reeling to multi-year lows against the greenback.
While a cheaper currency could in principle make exports competitive just as President-elect Donald Trump threatens to impose tariffs, central banks in Asia would need to assess its impact on imported inflation and avert speculative bets on a sustained weakness in their currencies that could complicate policymaking, analysts said.
The U.S. dollar has sharply appreciated since Trump won the 2024 presidential election, rising about 5.39% since the election on Nov. 5 stateside.
Part of the reason behind the U.S. dollar strength is the policies Trump had promised on the campaign trail, including tariffs and tax cuts, which are seen by economists to be inflationary.
Federal officials at their December meeting expressed concern about inflation and the impact that President-elect Donald Trump’s policies could have, indicating that they would be move slower on interest rate cuts because of the uncertainty, minutes released Wednesday showed.
The reassessment of the Fed’s monetary policy outlook has widened the yields gap between U.S. and several Asian bonds.
This interest rate differential has dimmed the allure of assets with lower yields, sending major Asian currencies lower and prompting some central banks including the Bank of Japan and the Reserve Bank of India to intervene.
James Ooi, market strategist at online broker Tiger Brokers told CNBC that a strong U.S. dollar would make it more difficult for Asian central banks to manage their economies.
A stronger U.S. dollar is likely “to pose challenges for Asian central banks by increasing inflationary pressures through higher import costs and straining their [central banks’] foreign exchange reserves if they attempt to support their currencies through interventions,” Ooi told CNBC over email.
“If a country is grappling with high inflation and a depreciating currency, lowering interest rates to stimulate economic growth can be counterproductive,” Ooi added.
China’s onshore yuan hit a 16-month low of 7.3361 on Jan. 7, pressured by rising U.S. Treasury yields and a stronger dollar.
A weaker yuan would ostensibly make Chinese exports more competitive and hopefully stimulate growth in Asia’s largest economy.
But Lorraine Tan, director of equity research for Asia at Morningstar, said a stronger U.S. dollar would limit the ability for the People’s Bank of China to lower interest rates without risking increased capital outflows, as well as helping the domestic economy to have more monetary flexibility.
China has been struggling to support its economy since last September, with several stimulus measures including interest rate reductions and support for the stock and property markets.
Most recently, the country expanded its consumer trade-in scheme aimed at spurring consumption through equipment upgrades and subsidies.
“Having said that, it is the fiscal spending side that needs to pick up to support China growth,” Tan added.
This view was echoed by Ken Peng, head of investment strategy for Asia Pacific at Citi Wealth. He said that the Chinese government should issue more long-term bonds to fund its economic stimulus, instead of cutting rates.
“[China] doesn’t need to do any more monetary policy. So it should not be a PBOC question. It should be [a] MOF [ministry of finance] question,” Peng said.
Also, in the often zero-sum world of export competitiveness, a pronounced weakness in the yuan could make it trickier for other Asian economies to increase the appeal of their products and services to foreign buyers.
Citi Wealth, in its 2025 outlook report, said a sharp depreciation of China’s currency could hurt economies that directly compete with or export to China, such as South Korea, Taiwan and others in Southeast Asia.
The Bank of Japan spent over 15.32 trillion yen ($97.06 billion) to shore up the currency over the course of 2024, after the yen plunged to multi-decade lows in July, hitting a low of 161.96.
Despite this, the currency is standing at around 158 against the greenback, at its weakest since July lows.
Japanese finance officials have repeatedly issued warnings against “one-sided” and “volatile” moves in the yen, most recently on Jan. 7.
To be sure, a strong dollar may partially play into the BOJ’s goals.
Having struggled to tackle deflation for decades, inflation in Japan has run above the BOJ’s 2% target for 32 months in a row. The BOJ has acknowledged that weakness in the yen could lead to a rise in imported inflation.
The challenge would be to ensure prices and wages don’t rise faster than levels the BOJ is comfortable with.
Tan at Morningstar said the strength of the greenback adds pressure on the BOJ to increase rates so as to prop up the yen and mitigate inflation risks.
Over in South Korea, its central bank recently intervened to support the won, according to a Jan. 6 report by Yonhap. Although the specific amount was not disclosed, it was enough to cause the country’s foreign reserves to fall to a five-year low.
The won has steadily depreciated against the dollar since Trump’s electoral victory, hitting about 1,476 against the greenback in December, its weakest level since 2009.
The Bank of Korea has appeared to prioritize stimulating domestic growth despite a weakening won, with the central bank enacting a surprise 25 basis points cut in its last meeting in November.
“Although volatility of the exchange rate has increased … downward pressure on economic growth has intensified. The Board, therefore, judged that it is appropriate to further cut the Base Rate and mitigate downside risks to the economy,” it wrote in its statement.
All these measures, however, were overshadowed by uncertainty when President Yoon Suk Yeol declared and then revoked martial law in early December, and was subsequently impeached.
The BOK convened an emergency meeting on Dec. 4, and pledged to provide “a sufficient amount of liquidity” until financial and foreign exchange markets stabilize. These measures will be in effect till the end of February.
Last among the major Asian currencies is India, which saw the rupee plunge to a record low of 85.86 on Jan. 8, due to pressure from the strong dollar and selling by foreign portfolio investors in October and November.
India is grappling with inflation that breached the RBI’s 6% upper tolerance limit in October, reaching 6.21%, although its has since moderated.
This comes at a time when the country faces slowing growth, with India’s most recent GDP reading coming in at 5.4% in its second fiscal quarter ending September, missing expectations and marking its lowest level since the last quarter of 2022.
In its most recent monetary policy meeting on December, the RBI held rates at 6.5% in a split decision, with two board members voting for a 25-basis-point cut.
Should India choose to cut rates to stimulate growth — which would weaken the rupee — the RBI is well equipped to deal with a potential sudden outflow of foreign funds and any steep fall in the rupee.
Citi Wealth said in its 2025 outlook report that “the central bank’s large foreign exchange reserves have brought greater stability to the Indian rupee.”
Citi’s Peng also describes the rupee as “one of the most stable currencies globally,” adding that “the only currencies that are less volatile than the Indian rupee are the pegged currencies like Hong Kong dollar. And so this should be relief for a lot of foreign investors who might have interest in this market.”