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Dollar’s Trump-inspired surge sets off intervention across Asia

by November 11, 2016 General

Bank Negara Malaysia Governor Muhammad Ibrahim: ‘No targeted level’ in role to continue managing extreme volatilities in the ringgit. — File picture by Saw Siow FengBank Negara Malaysia Governor Muhammad Ibrahim: ‘No targeted level’ in role to continue managing extreme volatilities in the ringgit. — File picture by Saw Siow FengSYDNEY, Nov 11 — The dollar headed for its biggest weekly gain in more than a year, spurring central banks from India to Indonesia to step in to stabilise their currencies on concern that US President-elect Donald Trump will pursue policies that spur capital outflows from developing economies.

The Indonesian rupiah, Indian rupee and South Korean won were among the day’s worst performers against the greenback on speculation that Trump’s policies will weaken exports from emerging nations. Trump has signaled he’ll adopt more protectionist trade policies, while introducing fiscal stimulus that has potential to hasten interest-rate increases by the Federal Reserve.

“We are seeing carnage in Asian FX markets,” said Robert Rennie, head of financial markets strategy at Westpac Banking Corp. in Sydney. “It’s providing a very strong reminder that the S&P 500 is not the correct barometer of Trump-driven risk aversion — it’s Asian currencies.”

The Bloomberg Dollar Spot Index, which tracks the currency against 10 major peers, was little changed today and is up about 2.5 per cent for the week, the biggest gain since May 2015.

The rupee sank to a seven-week low of 67.254 per dollar. The rupiah reached a five-month low against the greenback as emerging-market currencies headed for their worst three-day rout since 2013.

“Contrary to ideas of ‘race to the bottom’ or ‘currency wars’ where ‘everyone’ wants weaker currencies, a number of Asian central banks are believed to have sold dollars and bought their own currencies to slow the descent,”  Marc Chandler, global head of currency strategy in New York at Brown Brothers Harriman & Co., wrote in a note.

Stepping in

Indonesia’s monetary authority is already in the market to stabilise the rupiah, and doesn’t see much fund outflows and expects the move to be temporary, Nanang Hendarsah, head of financial-market deepening at the nation’s central bank, said in a text message. Bank Negara Malaysia Governor Muhammad Ibrahim said the monetary authority’s role is to continue managing “extreme volatilities in the ringgit with no targeted level”.

Indian state-run banks sold dollars on behalf of the Reserve Bank, according to two Mumbai-based traders, who asked not to be identified. Former Governor Raghuram Rajan had said the central bank intervenes to curb volatility and doesn’t target any particular rupee level.

Ringgit forwards tumbled even as movements in the spot currency remained restrained after the Malaysian central bank’s comments.

The Singapore dollar climbed, snapping a two-day drop, after the nation’s central bank said it was ready to curb excessive currency volatility if needed.

‘Freight train’

“It’s more a smoothing action because of the velocity of the moves today,” said Jeffrey Halley, a market strategist at Oanda Asia Pacific Pte in Singapore. “They’re not going to try to stand in front of a freight train. We may see more of this going forward. A lot of these emerging markets are going to have quite a lot of work to do vis-a-vis managing their currencies.”

Investors are betting Trump will cut taxes, ramp up infrastructure spending to spur economic growth and inflation, triggering Fed rate increases. Traders see an 84 per cent probability of a quarter-point hike at the central bank’s December meeting, according to pricing in federal funds futures.

After Trump’s election, benchmark 10-year Treasury yields climbed above 2 per cent for the first time since January on speculation the likely spending to spur growth will quicken inflation. Trump’s proposals include pledges to cut taxes and spend as much as US$500 billion on infrastructure.

“The market’s tone remains negative on bonds, emerging markets, positive on US stocks and the dollar,” said Nizam Idris, head of foreign-exchange and fixed-income strategy at Macquarie Bank Ltd. in Singapore. — Bloomberg