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Asian Emerging Market Currencies Pressured by Strong Dollar

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Indonesia's central bank stepped in to support the rupiah on Tuesday, while the Indian rupee fell to a record low as a rising dollar unleashed a rout on emerging market currencies.

Rising tensions in the Middle East following Iran's attacks on Israel and growing expectations that the Federal Reserve will delay rate cuts have boosted the US currency.

Last week, the dollar posted its strongest weekly performance since 2022 after strong US inflation numbers raised bets that the Federal Reserve will keep rates high for longer.

The Indonesian rupiah fell 2 percent to 16.176 against the dollar, its lowest point in four years, as markets in Jakarta reopened after a week of vacation. The central bank supported the currency in the spot and forward markets without delivery, and the governor commented that the bank was always in the market to stabilize the currency in this way. The rupee has fallen about 5 percent this year and is one of the worst-performing currencies in Asia.

Also on Tuesday, the Indian rupee fell 0.1 percent to a record low of 83.525 against the dollar, the Korean won fell 0.8 percent to 1,395, a 17-month low that forced a verbal intervention by the authorities, and the Malaysian ringgit was trading near a 26-year low, down 0.3 percent at 4.79.

Trinh Nguyen, senior economist at Natixis, said central banks in emerging economies could respond by raising rates to stop the decline of national currencies, in addition to intervening in the currency market. Particularly in Indonesia the possibility of a rate hike has increased, she added.

“The Indonesian rupiah has weakened greatly due to the current account deficit and capital outflows due to risk aversion. If that trend continues next week, I wouldn't be surprised if the central bank raises rates.”

Bank Indonesia is scheduled to hold a monetary policy meeting on April 23-24. It is widely expected to begin cutting rates later this year.

The rupee is the second-highest-yielding currency after the Indian rupee, but it is much more vulnerable as it relies more on foreign bond financing, Nguyen said.

The rupiah has also been hit this year by concerns that President-elect Prabowo Subianto's populist policies could damage Indonesia's fiscal strength.

Prabowo, who will succeed Joko Widodo in October, has promised to launch a free meals and milk program for schoolchildren that is expected to cost 460 trillion rupees ($28.4 billion).

Kishore Narne, head of commodities and currencies at Mumbai-based financial services group Motilal Oswal, said geopolitics, the strength of the dollar and local demand for the currency at the start of India's financial year in April have helped to bring down the rupee.

The Reserve Bank of India has previously intervened to manage currency weakness. “The RBI generally tends to control volatility, it will not let it go beyond 84,” Narne said.

Other central banks have hinted that they will take steps to support the depreciation of their currencies.

Bank Negara Malaysia “would ensure sufficient liquidity and orderly functioning of the foreign exchange market. . . and manage any risks arising from increased volatility in financial markets,” he said in a statement on Monday.

“BNM has engaged with financial market participants, including heads of treasury operations, who agree that any uncertainty will diminish and stabilize once the geopolitical situation subsides.”

The South Korean won hit a 17-month low on Tuesday, surpassing an important psychological threshold of 1,400 per dollar. It suffered the biggest drop among the world's major currencies this month, falling almost 4 percent. The currency has lost 8.7 percent of its value this year.

Rising tensions in the Middle East have added pressure on the won, as South Korea is a major importer of oil from the region. The won also moves in tandem with the Chinese renminbi, with China being the country's largest trading partner.

Alarmed by the sharp drop in the won, Korean authorities verbally intervened on Tuesday. “We are closely watching currency market movements and supply and demand with particular caution. Excessive herding behavior is not desirable for our economy,” officials from the Ministry of Finance and the Bank of Korea said in a joint statement.

After the statements, the won cut some losses and closed local trade at 1,395 units per dollar.

Christopher Wong, currency strategist at OCBC, said a weaker renminbi reference rate from China was compounding pressure from a stronger dollar.

“[The currencies] It could still weaken a bit if these factors continue, but authorities are also intervening to stop market volatility.”

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