Asian governments are increasingly intervening in the market to stem the slide in local currencies that has been driven by the strong US dollar this year.

According to the Nikke Asia report, the relative strength of the US economy and high interest rates, which are likely to remain high for an extended period, have caused Asian currencies to weaken.

Asian policymakers are responding to the dollar’s strength with varying degrees of caution, from verbal warnings to interest rate hikes. Some are even believed to be intervening by buying local currencies from the market. The move is seen as “undermining the credibility of central banks”, says the report.

Analysts will be focusing on the US Consumer Price Index for April, which will be released on Wednesday. Last month’s data caused the Japanese yen to fall sharply against the dollar. The Japanese yen is one of the Asian currencies most affected by the stronger-than-expected US economy.

Intervention continues as yen falls in Japan

Analysts say that although official data has not yet been released, the Japanese government appears to have intervened twice on 29th April and 1st May to support the yen. Prior to the first suspected intervention, the yen had fallen to its lowest level in 34 years, breaching the 160 level against the dollar.

The yen’s decline has been driven by the almost 5 percentage point difference in bond yields between the US and Japan. According to Refinitiv, the Japanese yen is hovering around 155 against the dollar, down 9.4% this year.

According to Mizuho Securities strategist Shoki Omori, further dollar selling and yen buying intervention may be difficult for Tokyo without support from Washington.

The summary of the Bank of Japan’s (BoJ) April policy meeting released last week showed that President Kazuo Ueda struck a “hawkish tone” compared to his previous public statements. While some board members felt that rate hikes could be accelerated, many said that the BoJ should reduce bond purchases.

However, Omori believes that “short” positions against the yen will continue until fundamentals change, as there is “no magic wand” to reverse the yen’s weakness.

South Korea’s central bank ‘burns dollars’

South Korea’s foreign exchange reserves fell by around $6 billion last month from March, partly due to the country’s efforts to halt the fall of the won, according to the Bank of Korea.

The country’s central bank said in a statement that the decline in foreign exchange reserves was related to several factors, including “market stabilisation measures such as currency swaps with the National Pension Service”, which were introduced in September 2022.

According to Moon Da Woon, an economist at Korea Investment & Securities in Seoul, the markets believe that the South Korean government is helping to stem the won’s rapid decline.

South Korea’s finance ministry and central bank verbally intervened in April to warn against rapid currency movements when the won hit the 1,400 level against the US dollar for the first time in almost a year and a half.

Indonesia hikes rates

In Indonesia, the central bank unexpectedly raised its benchmark interest rate by 25 basis points to 6.25% last month in a bid to strengthen the currency.

Bank Indonesia Governor Perry Warjiyo told a press conference last week that data showed no further rate hikes were needed for now and pledged to work to strengthen the currency to below 16,000 per dollar.

The rupiah has strengthened to around 16,000 to the dollar from around 16,300 before the surprise rate hike, but has yet to recover after falling to a four-year low last month.

Indian rupee and Malaysian ringgit also fall

The Indian rupee, one of Asia’s most stable currencies, fell to an all-time low of 83.739 against the dollar last month.

The rupee has been “tightly managed” by the Reserve Bank of India almost since October and has traded in a narrow range around 83, said Rob Carnell, chief Asia-Pacific economist at ING in Singapore.

Carnell said all central and regional banks in Asia, except Malaysia, have foreign exchange reserves to cover more than six months of imports, the threshold for adequate reserves.

The Malaysian ringgit is trading at 4.737 to the dollar, having fallen to a 26-year low of 4.7965 in February.

The ringgit’s weakness is due to the strengthening dollar, a decline in Malaysia’s current account surplus and the currency’s strong correlation with the weakening Chinese yuan.

China will start selling the first batch of 1 trillion yuan ($138 billion) of ultra-long term private government bonds on Friday to help revive the economy.

The central government will begin such sales this year by issuing 30-year bonds, according to a statement from the Ministry of Finance. According to Bloomberg, this ends months of speculation about when the bonds, only the fourth of their kind in 26 years, will be launched after a sweeping plan was announced in March.

According to the report, President Xi Jinping’s government is stepping up financial support to help an economy under pressure from the housing crisis and weak consumer confidence. Government spending on infrastructure, which can be financed through bonds, will play a key role in helping China achieve its annual growth target of around 5 per cent, above economists’ forecasts.

Australia & New Zealand Banking Group’s Xing Zhaopeng said the increase in gross domestic product could be as much as 1 percentage point.

“The timing of the bond issue is likely aimed at offsetting the impact of protectionist tariffs the US has threatened to impose on Chinese goods,” Zhaopeng said, noting the uncertainty ahead of a Communist Party meeting on reforms in July.

The 20-year and 50-year bonds will be sold on 24 May and 14 June respectively. Bond auctions will continue until the last batch of 30-year bonds goes on sale in November. The ministry did not disclose the amount of bonds to be sold.

Bloomberg announced the private government bond sale on Monday. The issue will include 300 billion yuan of 20-year bonds, 600 billion yuan of 30-year bonds and 100 billion yuan of 50-year bonds, according to people familiar with the matter, who requested anonymity because the information is private.

The defence chiefs of the United States, Japan, Australia and the Philippines have announced plans to hold more naval exercises as they seek to increase cooperation against China.

The officials met at the US Marine Corps base Camp H.M. Smith in Hawaii for a series of bilateral and joint talks.

The meeting is part of US efforts to increase cooperation among its allies to counter Beijing’s influence in the region.

The quadrilateral talks come less than a year after the first quadrilateral meeting between the countries’ defence chiefs on the sidelines of the Asian security forum known as the Shangri-La Dialogue.

As tensions rise in the Taiwan Strait and the South China Sea, where the four countries’ militaries conducted their first joint patrols in April, the countries are strengthening defence ties by focusing on maritime cooperation. This week, the US and the Philippines conducted live-fire exercises in the disputed waters, while four Chinese ships fired water cannon at a Philippine vessel for violating territorial waters.

US Defence Secretary Lloyd Austin, who hosted the meeting, said at the joint press conference that the four countries wanted to “conduct more naval exercises and activities” to improve the interoperability of their forces.

Austin criticised China’s recent actions as “irresponsible behaviour” that “flouts international law” and recalled the mutual defence treaty with the Philippines: “I can only say that you have heard me and the President say many times that our commitment to the treaty is unwavering.”

Similarly, Philippine Defence Secretary Gilberto Teodoro Jr. called the discussion of hypothetical scenarios “unproductive”. He said the quadrilateral meeting was about sending a common message in the face of a “unilateral declaration by a single actor”.

Australian Defence Minister Richard Marles said his counterparts discussed the “increased tempo” of defence exercises in the face of global challenges to the “rules-based order”.

Japanese Defence Minister Minoru Kihara said the Mutual Access Agreement (RAA) negotiated with the Philippines will strengthen bilateral relations and help advance maritime cooperation among the four countries.

“We are united in strongly opposing any attempt to unilaterally change the status quo in the South China Sea through the use of force or any activity that would raise tensions in the region,” he said.

The bilateral meeting between Kihara and Austin followed a summit between US President Joe Biden and Japanese Prime Minister Fumio Kishida in Washington in April. The two sides also announced plans to hold a “2+2” meeting between their leaders and senior defence officials.

The defence ministers of the US, Japan and Australia also held their 13th trilateral defence ministers’ meeting and signed an agreement on defence science and technology cooperation.

Containment strategy

Beijing believes that Washington, through its allies in the region, is pursuing a strategy of containment of China and raising tensions in the Asia-Pacific.

In a speech last year, Chinese President Xi Jinping described the United States as “the power behind the containment, encirclement and suppression” of China. The Biden administration denies this.

Financial Times columnist Edward Luce, who was also a speechwriter for US Treasury Secretary Lawrence H. Summers during the Clinton administration, had previously taken up this containment debate.

Luce stated that the US policy of containment of China is now very obvious as follows: “The original idea of containment, set out in George Kennan’s 1947 Foreign Affairs article, was more modest than the undeclared containment that is now US policy.”

“Kennan’s advice was twofold: Stop the expansion of the Soviet empire; and promote Western democracy,” Luce wrote, describing the US approach to China today as “a higher level of containment”.