(Jan 23): Policymakers across Asia’s emerging markets are digging deeper into their toolkits to fend off a relentlessly strong greenback as Trump-administration tariffs loom.
 
Indonesia — already intervening regularly to rein in a weak rupiah — will now require commodities firms to repatriate all of their overseas earnings. South Korea sold won debt to top up its coffers for defending the exchange rate for the first time in 21 years. 

A historically strong dollar, high US yields and the prospect of financial-market turmoil spurred by punitive White House trade policy have developing-market officials in a bind. They can’t tackle slowing growth via interest rates for fear of triggering a slump in the currency, and vigorous foreign exchange interventions risk depleting reserve buffers. 

“It’s a very fine balancing act,” said Stefanie Holtze-Jen, Deutsche Bank AG’s chief investment officer for Asia-Pacific. “You don’t want to have a currency under pressure because you then have that risk of potential currency outflows as well.” 

Countries such as India and Indonesia are starting into the year with ample war chests of reserves. Authorities typically seek to fend off sharp swings in the market rather than targeting a particular level of the exchange rate. Interventions — either via the spot market or derivatives — are typically the first line of defense.

But these can be costly: India’s foreign exchange reserves have dropped by US$80 billion (RM355.14 billion) from a record US$705 billion reached at the end of September. And the Reserve Bank of India lately appears to be easing its grip on the rupee.

While there’s little sign authorities are running out of firepower — or innovative ideas — just yet, the risks loom large. Past examples of crises in places like Sri Lanka and Argentina serve as reminders of what can happen when things go wrong. 

Still, emerging markets are getting creative. Last year Malaysia sought to lift its currency from a 26-year low by encouraging state-linked firms to repatriate foreign investment income.

Indonesian central bank bills were designed to stabilise the rupiah by attracting foreign funds with a juicy yield. More recently, China stepped up support for the yuan by limiting lending in the currency in Hong Kong.  

“Asia can use its eclectic toolkit,” such as requiring exporters to convert proceeds earned abroad, limiting imports of gold, or activating swap lines, Nomura Holdings Inc economist Sonal Varma and colleagues wrote in a note earlier this month. “One size does not fit all.”

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