A resurgent US dollar is exasperating central bankers and governments around the world, forcing them into action to relieve the pressure on their own currencies.

The dollar inched higher in Asian trading last week as markets assessed former president Donald Trump was the victor in the first US presidential debate.

President Joe Biden stumbled through early exchanges in the debate, a performance that may intensify worries about his ability to defeat Trump in the November election.

Trump has reiterated a pledge to impose 10% duties on imports should he win in November, a move that could put upward pressure on inflation, potentially delaying interest-rate cuts that could weigh on the greenback.

“Strength in US activity has been a mainstay of our long-dollar bias, and the persistence of US exceptionalism is a major FX theme. But this has always been in the context of high market conviction that the Fed would invariably begin its easing cycle this year. This is now being challenged, and the corresponding de-pricing of Fed cuts has taken the dollar to new year-to-date highs,” says Meera Chandan, Global FX Strategist, JP Morgan.

The resurgent dollar is wrecking havoc in Asia this year, putting pressure on central banks to step up the defence of their currencies.

Traders are watching for authorities to intervene in Japan while policymakers in India, Vietnam and Indonesia have all stepped into the market.

“The high-for-longer US rates environment is undermining recovery hopes for Asia currencies,” said Christopher Wong, FX strategist at Oversea-Chinese Banking Corp in Singapore. “And now woes are piling on following the renewed weakness in the yuan and the yen. Central banks may have to resort to stronger intervention to smooth volatility.”

The Bloomberg Dollar Spot Index has climbed almost 5% since end-December as Federal Reserve officials signal that they may hold off on rate cuts until inflation falls sustainably to their target.

The yuan’s weakness has also contributed to the Bloomberg Asia Dollar Index’s decline of over 3% this year. The Chinese currency has fallen more than 2% in 2024.

The weakness in the yen and the yuan is seen to have spillover effects on regional currencies, especially the won and the Taiwan dollar.

Other emerging-market currencies have not been spared either, with the Turkish lira and Brazilian real sliding more than 10% this year.

The greenback has gained against virtually every major peer in 2024, defying many on Wall Street who came into the year predicting a dollar selloff. That’s prompted escalating warnings from Japan on its readiness to intervene to buoy the yen from near a 34-year low.

China and Indonesia have moved to steady their currencies, while Sweden and India are also under pressure.

Those intensifying efforts are reminiscent of 2022 when officials in Switzerland and Canada lamented their weakening exchange rates amid a surge in inflation and the strong dollar ripped through emerging economies, contributing to Sri Lanka’s historic default.

“The US dollar keeps turning up the heat on other central banks,” said Helen Given, a foreign-exchange trader at Monex. “Given the current global environment where central banks appear to be looking to end their tightening cycles, there doesn’t seem to be a safe way out from the dollar’s continued dominance.”

Exchange rates matter because depreciating currencies increase the cost of imported goods, stoking inflation as those expenses feed through to prices in grocery stores and factories. Meanwhile, there’s a higher likelihood that money will pour out of a nation with a weak currency in search of higher yields elsewhere — so-called capital flight — harming domestic investment and growth.

The irony, of course, is that unilaterally intervening in currency markets — where $7.5tn changes hands every day — can only temporarily alter an exchange rate.
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