Singapore, Aug 1, 2010 (FBC) – Asia’s foreign exchange reserves posted their biggest six-month decline in years, signaling policymakers’ determination to protect currencies from persistent downward pressure from a stronger US dollar.
In the first half of 2022, total reserves fell by $372 billion, or 6.2 percent. In the six months to January 2016, it was the biggest percentage drop in half a year.
Thailand fell 10.4% to $201.4 billion at the end of June, followed by the Philippines, whose reserves fell 7.3% to $100.9 billion in the same period.
India and Japan came in third, both sliding 7% to $529.2 billion and $1.2 trillion at the end of June.
“Usually, actually, Asian economies don’t worry that much about a weak currency, because most of them are big exporters … but the scale of the movements was so big that it was causing concern,” senior Alex Holmes said. Economist at Oxford Economics.
“The biggest factor is that most countries are now battling high inflation for more than a decade, compounded by a weak currency.”
Deutsche Bank’s currency volatility index, which measures expected flows in foreign currencies, is up more than 70 percent this year.
The Reserve Bank of India (RBI) has said it is ready to draw down its foreign exchange reserves further to curb any sharp depreciation.
ANZ economist and foreign exchange strategist Dheeraj Nim expects the RBI not to run out of reserves too quickly or aggressively.
“We don’t know exactly what the maximum rate of Fed funds will be at the end of this cycle … so the uncertainty means that I think the RBI still needs to be careful about how they manage their FX reserve intervention policy.”
Similarly, only a higher rate tone from the Fed could give other currencies in the region some respite and reduce the need for more significant reserve reductions.
“A deeper correction in the dollar could be the key to relieving the pressure valve,” said Christopher Wong, senior FX strategist at Maybank.
Overall, Asian fundamentals have improved significantly since mid-2013 and the 1997 Asian financial crisis, giving policymakers some leeway to continue reducing their reserves. But economies such as India, Thailand and the Philippines, which are running current account deficits, may be more vulnerable.
Galvin Chia, emerging market strategist at Nat West Markets, said foreign investment into Asia was not enough to cover trade deficit gaps.
But each of these vulnerabilities is not enough, for example the gap between the external financing and the trade deficit, … to indicate some kind of risk.
The last time pan-Asian stocks fell sharply in half a year, in the six months to Aug. 1, 2015, after Beijing made a surprise devaluation and spent heavily to stabilize the currency.
(Reporting by Ray Wei in Singapore and Patthuraja Murugabopathi in Bengaluru; Additional reporting by Gaurav Dogra in Bengaluru; Editing by Vidya Ranganathan)