Asian currencies reached their weakest levels in 19 months on Wednesday, and the CEO of one of the world’s largest independent financial advisory and asset management organisations warns that this trend of weakness is likely to continue for the rest of the year.
Nigel Green of deVere Group’s warning comes as The Bloomberg Asia Dollar Index fell 0.1% on Thursday to the lowest since late 2022.
He says: “The primary factor exerting pressure on Asian currencies is the robust performance of the US dollar.
“The greenback has risen substantially against a basket of major currencies, buoyed by expectations that the Federal Reserve will continue its policy of higher interest rates.
“This stance contrasts sharply with the approaches of other central banks, many of which are either pausing or cutting rates to stimulate economic growth.”
Higher US interest rates make dollar-denominated assets more attractive to investors, leading to increased demand for the currency.
“This demand drives the dollar’s value up while putting downward pressure on other currencies, particularly those of emerging markets that rely heavily on foreign capital inflows.”
The depreciation of Asian currencies can be attributed to several interconnected factors, notes the deVere Group CEO.
“Higher US interest rates tend to trigger capital outflows from emerging markets as investors seek higher returns in the US. This capital flight leads to weaker currencies in the affected countries.”
He continues: “Many Asian economies are heavily reliant on exports. A stronger dollar makes their exports more expensive and less competitive on the global market, further straining their economies and currencies.
“Also, a significant portion of debt in emerging markets is denominated in US dollars. As local currencies weaken, the cost of servicing this debt increases, leading to potential fiscal instability.”
Another critical factor contributing to the bearish outlook on Asian currencies is the ongoing depreciation of the Japanese yen.
“The yen’s weakness is having a ripple effect across the region, influencing investor sentiment and exacerbating the stress on other Asian currencies.”
The sustained weakness in Asian currencies poses several risks and challenges.
A weaker currency leads to higher import prices, contributing to inflationary pressures within these economies. This erodes purchasing power and reduces consumer spending, slowing economic growth.
Currency volatility can also be expected to lead to broader financial market instability. As such, investors could become increasingly wary of emerging markets, leading to reduced capital inflows and increased borrowing costs.
Nigel Green concludes: “Given the current economic landscape, our outlook on Asian currencies remains bearish for the remainder of 2024.
“The combination of a strengthening US dollar, divergent monetary policies, and the ripple effects of the yen's depreciation creates a challenging environment for these currencies.”
