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Indonesia's central bank intervened to support the rupiah on Tuesday, while the Indian rupee fell to a record low as a rising dollar sparked a wave of turmoil in emerging market currencies.
Rising tensions in the Middle East in the wake of Iranian attacks on Israel and growing expectations that the Federal Reserve will delay interest rate cuts have strengthened the US currency.
Last week, the dollar recorded its strongest weekly performance since 2022 after strong US inflation numbers increased bets that the Federal Reserve will keep interest rates high for longer.
The Indonesian rupiah fell to 16,200 against the dollar, its lowest level in four years, as markets reopened in Jakarta after a week-long holiday. The currency has fallen about 5 percent this year and is one of the worst-performing currencies in Asia.
Also on Tuesday, the Indian rupee fell to a record low of 83.535 against the dollar, the Korean won fell to a 17-month low, and the Malaysian ringgit traded near a 26-year low.
Trinh Nguyen, chief economist at Natixis, said central banks in emerging economies could respond by raising interest rates to stem the decline of local currencies as well as intervening in the foreign exchange market. She said the possibility of a rate increase in Indonesia in particular had risen.
“The Indonesian rupiah has weakened a lot on the back of current account deficit and capital outflows due to risk aversion. If this trend continues next week, I would not be surprised if the central bank raises interest rates.
The Bank of Indonesia is scheduled to hold a monetary policy meeting on April 23-24. It is widely expected to start cutting interest rates later this year.
The rupee is the second highest yielding currency after the Indian rupee, but it is more vulnerable because it relies more on foreign financing for bonds, Nguyen said.
The rupiah has also taken a hit this year due to concerns that President-elect Prabowo Subianto's populist policies could hurt Indonesia's financial strength.
Prabowo, who will take over from Joko Widodo in October, has promised to launch a program of free meals and milk for school children that is expected to cost 460 trillion rupiah ($28.4 billion).
Geopolitics, a strong dollar and domestic demand for the US currency at the start of the Indian fiscal year in April helped push the rupee lower, said Kishore Narne, director of commodities and currencies at Mumbai-based financial services group Motilal Oswal.
The Reserve Bank of India has previously intervened to manage currency weakness. “The RBI generally tends to control volatility and will not allow it to fall beyond the 84 level,” Narni said.
Other central banks hinted at taking measures to support their devalued currencies.
Bank Negara Malaysia will “ensure adequate liquidity and orderly functioning of the foreign exchange market…it will address any risks arising from increased volatility in the financial markets,” it said in a statement on Monday.
“The Central Bank of Malaysia has engaged with financial market participants, including heads of treasury operations, who have agreed that any uncertainty will subside and stabilize once the geopolitical situation eases.”
The South Korean won hit its lowest level in 17 months on Tuesday, surpassing the key psychological limit of 1,400 per dollar. It suffered the largest decline among the world's major currencies this month, falling by about 4 percent. The currency has lost 8.7 percent of its value so far this year.
Rising tensions in the Middle East have increased pressure on the won, as South Korea is a major oil importer from the region. The won is also moving in tandem with the Chinese renminbi, as China is the country's largest trading partner.
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Alarmed by the sharp decline in the value of the won, Korean authorities made a verbal intervention on Tuesday. “We are closely monitoring foreign exchange market movements, supply and demand with special caution. Excessive herd behavior is undesirable for our economy,” officials at the Ministry of Finance and the Bank of Korea said in a joint statement.
After these statements, the won reduced some of its losses, closing local trading at 1,395 per dollar.
Christopher Wong, foreign exchange strategist at OCBC, said the weakening of the renminbi reference rate by China was adding to pressures from a stronger dollar.
“[The currencies] It will likely weaken somewhat if these factors continue to influence, but policymakers are also stepping in to stem market volatility.
