$8.5 trillion foreign exchange pile is Asia’s shield from resurgent US dollar

Mumbai - A US$6.4 trillion (S$8.5 trillion) foreign-exchange reserve pile in Asia is giving investors confidence that central banks have the ammunition to fight the US dollar’s strength stemming from the US presidential election. 

Asian currencies have come under pressure in October, as rising odds of a Donald Trump presidency and uncertainties over the pace of the US Federal Reserve’s easing bolstered the greenback.

A Bloomberg index of the region’s currencies just had its worst month since February 2023, with the Indian rupee near its weakest ever and South Korea’s won close to a three-month low.

Strategists expect the losses to extend, especially if Trump returns to power and reignites a trade war.

However, a years-long increase in foreign-exchange reserves means central banks are in pole position to smooth volatility, according to Barclays and MUFG Bank. That firepower is important since the Fed is no longer in a tightening cycle, making interest rate hikes to support currencies a difficult option for Asia’s central banks.

“Asian forex reserves have continued to grow, and there’s certainly plenty of ammunition,” said Mr Mitul Kotecha, head of forex and emerging markets’ macro strategy for Asia at Barclays. While markets have priced in a Trump victory, “we still expect to see some further pressure on Asian currencies should that be the case”, he added.

The US$6.4 trillion pile for Asia excluding Japan compares with US$6.2 trillion at the end of 2023 and US$5.9 trillion the year before, according to data from 10 economies compiled by Bloomberg. China accounts for almost half of the reserves, while India’s has swelled to a record US$700 billion. 

India, Thailand and the Philippines are among the nations that rank high in terms of the sufficiency of reserves to protect currencies, according to Nomura Holdings and Bank of America.

Vietnam and Malaysia are less comfortably placed, according to MUFG Bank. 

Forex volatility 

The sudden weakness in Asian currencies has come as a surprise to many, as the dominant market view until just a few months ago was that the US dollar would soften along with the Fed’s easing. Armed with the mountain of reserves, central banks have been vowing action against volatile swings, worried about capital outflows and constraints to their monetary policy room.

South Korea has promised to act swiftly to curb excessive volatility in the won, while an Indonesian official said that the central bank stands ready to step into the market. 

Reserve Bank of India governor Shaktikanta Das has been vocal about the need to build reserves, calling the stockpile a “safety net” against any volatile capital flows. 

There are other tools, also. 

In China, foreign exchange swaps have quietly become a key tool for state-run lenders seeking to prop up the renminbi. Malaysia’s central bank has been encouraging state-linked firms to repatriate foreign investment income and convert it into the local currency.

Keeping currencies stable has become all the more important as central banks start lowering rates to tackle slowing economic growth.

Bank Indonesia kicked off the region’s easing cycle with an unexpected rate cut in September, followed by South Korea, Thailand and the Philippines in October.  

With the greenback likely to be supported amid election-related uncertainties, Asian officials will remain on guard. TD Securities strategist Prashant Newnaha expects a “multi-month dollar run higher”.  

Mr Michael Wan, senior currency analyst at MUFG Bank, said: “Asia’s forex reserves cover are more than adequate across most countries.

“Forex reserves should be most Asian countries’ first line of defence, but perhaps more so for countries such as India and Indonesia, which prefer and target forex stability.” BLOOMBERG