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Asian central banks are back in currency markets

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by November 18, 2016 General

Singapore: Indian and Malaysian central banks are stepping into foreign-exchange markets again to steady currencies pressured by signs the US will have to raise rates faster than expected to contain inflation.

Bank Negara Malaysia Assistant Governor Adnan Zaylani said on Friday the monetary authority was intervening after the ringgit dropped to a 10-month low. Indian state-run lenders sold dollars, probably on behalf of the Reserve Bank of India (RBI), according to two Mumbai-based traders who didn’t want to be identified. Developing-nation currencies have tumbled after Donald Trump’s upset win in the US presidential election on November 8, as indications he will spend on domestic infrastructure revived demand for the greenback.

While many nations worldwide — developed and emerging — had fretted in recent years that too-strong currencies were crimping exports, the ferocity of the post-Trump dollar rally has spurred Asia’s policy makers to step in to minimise the potential for disruption. Indonesia’s central bank intervened a week ago after the rupiah dropped as much as 3 per cent. Malaysia’s central bank said the same day it would manage volatility and India’s central bank was said to be buying rupees.

“We think Asian central banks will not be worried about seeing their currencies depreciate against the US dollar,” said Enrique Diaz-Alvarez, chief risk officer at foreign-exchange broker Ebury in New York, Asia’s most-accurate forecaster last quarter. “They may smooth out spikes in volatility, but this is far less expensive in terms of foreign-exchange reserves and they have more than plenty for that. We think that the story now is not so much a flight from Asian currencies but as a pure dollar rally.” Malaysia’s ringgit has weakened 4.9 per cent since Nov. 8 and South Korea’s won has dropped 4 per cent. Indonesia’s rupiah lost 2.6 per cent, the Philippine peso fell 2.3 per cent and India’s rupee declined 2.2 per cent.

Federal Reserve Chair Janet Yellen said on Thursday that the monetary authority is close to raising borrowing costs as the economy continues to gain traction. The ringgit and rupiah are the most vulnerable Asian currencies to higher US borrowing costs, said Divya Devesh, a foreign-exchange strategist at Standard Chartered in Singapore. Taiwan’s dollar and China’s yuan will underperform if the US shifts to trade protectionism, he said.

Bank Indonesia said last on Friday that it intervened to stabilise the rupiah. The central bank said Thursday that it had a limited presence in the currency market and that conditions had improved relative to last week.

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