Strong Dollar Still Snowballing across Asia
The comments below are an edited and abridged synopsis of an article by Brad Setser
The US dollar’s strength is putting pressure on economies around the world, including in developing Asia. What makes this bout of dollar strength unique is that the stress is not limited to Asia’s developing economies.
Asian economies are diverse and the direct financial effect of dollar strength varies. Some regional economies have significant foreign currency debts and limited foreign currency reserves. These economies are in financial trouble.
Sri Lanka, Pakistan and Bangladesh have looked to the IMF for support with debt, while a broader set of Asian economies, including India, have relatively strong foreign currency balance sheets.
Balance sheet resilience is not sufficient to insulate a country’s broader economy from the effects of a strong dollar. Even countries that are strong financially worry about the effect of currency weakness on the cost of living.
There has been little correlation between the extent of currency depreciation across the main Asian currencies and the underlying strength of countries’ foreign currency balance sheets. The currencies of advanced Asian economies have actually depreciated more than the currencies of developing Asian economies.
Japan—with plenty of reserves, significant foreign assets in its government pension fund and insurance companies that are structurally long dollars—has experienced the largest depreciation. Taiwan and South Korea have followed.
Meanwhile, India, Indonesia, Malaysia and Thailand have experienced smaller depreciations because, until Japan’s intervention in September 2022, lower-income Asian economies were more willing to defend their currencies through a combination of rate increases and foreign reserve sales. This may be changing.
Even though the dollar is now off its October peak, developing Asian economies continue to face three risks that Setser discusses: Certain economies may overestimate their balance sheet strength and sell foreign exchange for longer than is prudent; the possibility of an additional shock from Japan; and a currency shock from China.