Asian Central Banks Intervene In Foreign Exchange Markets To Deal With Falling Currencies

Forex News

The increase in the yield of US bonds, the strength of the US dollar, the growing tension with regard to global trade and the outflow of capital put pressure on world markets, including the Asian ones. Against the background of the fact that the tension in trade could disrupt the supply chain in Asia, the economies in the region are already dealing with some weakness in export orders, which raised growth last year.

Instead of raise interest rates in lockstep with the Federal Reserve, central banks in Asia are selling dollars and supplanting the easy money. Intervening by buying and selling currencies has been the default policy option since the 1997/98 financial crisis for Asia's governments.

Central banks in Asia intervene in the foreign exchange markets, while simultaneously injecting cash into their economies. Since monetary policy is a hostage to external market conditions, central banks must strike a balance between maintaining a stable economy and a stable currency.

Bank Indonesia says it is willing to raise rates if need be to defend the rupiah. The rupiah has fallen 5% in three months, and the Bank Indonesia has persistently sold dollars to support its currency. At the same time, it is buying bonds to replenish the rupiah it has absorbed through that intervention. Bank Indonesia spent about $6 billion of its reserves in February-March to defend the rupiah. The currency has over the past couple of weeks stabilized around 13,950 per dollar.

Meanwhile, the Philippine central bank has said it is content to leave monetary policy unchanged, despite rising inflation, a weak peso and falling stock market. Worried about a slowdown in the overseas workers' remittances back to the country, it even cut banks' reserve ratio early this year.