In Asia, US dollar’s growing strength gives rise to stability concerns, suspected rate intervention

With the US Federal Reserve poised to keep borrowing rates higher for longer – a move that would maintain pressure on Asian currencies – analysts expect that China’s central bank is likely to let the yuan weaken while also being mindful of capital outflows and trade conflicts.

As widely expected, the US Fed on Wednesday left its interest rate target range unchanged at 5.25 to 5.50 per cent, with chairman Jerome Powell reaffirming the need for more evidence of inflation cooling before the next policy move.

The US dollar has been rallying against other currencies amid diminishing hopes that the US central bank will aggressively cut interest rates this year.

The US dollar index has risen by more than 4 per cent since the start of the year, triggering alarm bells among central banks in Asia that are running significant trade deficits with the US.

In mid-April, finance officials from the US, Japan and South Korea agreed to “consult closely” on foreign exchange markets, acknowledging concerns from Tokyo and Seoul over their currencies’ recent sharp declines.

Japan’s finance minister, Shunichi Suzuki, said last month that Tokyo would not rule out measures to deal with excessive volatility in the foreign exchange market, adding that it was important for currencies to move stably, reflecting fundamentals.

Analysts suspect Japanese authorities have stepped into the foreign exchange market twice this week to prevent sharp and economically debilitating declines in the yen, but there has been no official confirmation of this taking place.

In contrast, over the past few months, the People’s Bank of China has kept the onshore daily fixings of the yuan strong relative to survey expectations, maintained benchmark lending rates, and also managed offshore yuan liquidity – all of which pointed to its “defensive” stance in yuan exchange rates, the Bank of America said last week.