As trade talks enter a sensitive phase, central banks in several Asian economies are reducing their intervention in currency markets out of fear of being “targeted” by US President Trump.
Central banks in India and Malaysia have reduced their holdings of derivatives used to suppress local currencies. Taiwan has allowed the New Taiwan dollar to soar against the US dollar in recent weeks and hinted that it would allow the New Taiwan dollar to have more room to appreciate if these measures are “orderly.” At the same time, South Korea’s national pension fund has also ended its five-month support measures for the won.
The fundamental reason for the above central banks to do so is that the US dollar has fallen by more than 7% this year, reducing pressure on emerging market currencies.
But some market analysts pointed out that these economies may also be worried about provoking a backlash from Trump. The market speculates that monetary policy will become a bargaining chip in the ongoing series of trade negotiations.
Rajeev De Mello, portfolio manager at GAMA Asset Management, said: “Fear of being labeled as a currency manipulator by the United States, especially during tariff negotiations, will prompt central banks to reduce their heavy foreign exchange intervention in currency markets.”
The market generally predicts that if the central bank reduces intervention, the Korean won and the ringgit will appreciate the fastest because both economies have huge trade surpluses with the United States.
While Taiwan’s central bank may still intervene if necessary to curb exchange rate fluctuations, most market participants believe that the central bank will allow the Taiwan dollar to appreciate further even after hitting multi-year highs.
This also means that the currencies have room to rise further based on the rebound against the US dollar. The Taiwan dollar has surged 11% against the US dollar this year, becoming the best performing currency in the region. The Korean won has risen nearly 8%, and the ringgit has risen about 5%.
