Emerging Asian currencies weakened on Monday as the Federal Reserve signalled a longer duration of higher rates to tame soaring inflation, lifting the U.S. dollar to a 20-year high and hitting Thailand’s baht and South Korea’s won particularly hard.
Indonesia’s rupiah and the Philippine peso weakened 0.4% and 0.1%, respectively, while Singapore’s dollar fell 0.4% to a more than one-month low.
The dollar index, which tracks the currency against six major peers, rose 0.2%, pressuring most regional currencies, after Fed Chair Jerome Powell’s hawkish remarks at the Jackson Hole symposium on Friday.
Powell said the Fed will raise rates as high as needed to restrict growth, and would keep them there “for some time” to bring down inflation.
The greenback’s 14% gain so far this year has been a major headwind for emerging currencies as rising consumer prices forced the Fed to rapidly raise interest rates from their record-lows.
“Powell’s invocation of ‘rational inattention’, highlighting risks of high inflation-expectations feedback, gives a glimpse of a greater hawkish bias than previously assessed,” said Vishnu Varathan, head of economics & strategy at Mizuho Bank.
The baht slumped 1% and was among the region’s biggest underperformers after data on Friday showed July exports rose at their slowest pace in more than a year. While the broad dollar strength has hurt the baht, Thailand has also been a regional laggard in raising rates, further widening the U.S.-Thai yield gulf.
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Malaysia’s ringgit fell 0.5%. The country’s consumer price index rose 4.4% in July from a year earlier, in line with forecast.
South Korea’s won declined 1.4% to its lowest in over 13 years.
Bank of Korea Governor Rhee Chang-yong told Reuters over the weekend that the bank must keep raising rates until the rate of inflation was in decline, adding that a halt to policy tightening could not occur before the Fed.
The governor also said that speculators weren’t behind the won’s sell-off. The currency has lost over 11% so far this year.
“The hiking cycle may be extended into the early part of 2023, while another 50 bp (basis points) hike cannot be ruled out after last week’s 25 bp hike with upward revisions in inflation,” analysts at OCBC Bank said in a note.
Stocks in Seoul dropped 2.3% and were set to mark their worst day in more than two months amid the broader risk-off sentiment.
Equities in the rest of emerging Asia were mixed with Thailand’s benchmark index and stocks in Indonesia retreating 1.3% and 0.7%, respectively.
Share markets in the Philippines were closed on account of a public holiday.
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