The worst may soon be over for Asia’s emerging-market currencies, which have come under pressure during the Iran war, as central banks have begun stepping up their support, having stashed away extra reserves for just such a situation.
Policymakers in Indonesia, India and Taiwan have all intervened in foreign-exchange markets over the past two weeks, while China signaled support for its currency by setting a stronger daily fixing. A number of other authorities have issued verbal warnings as they seek to damp volatility.
Regional central banks have, in one sense, been preparing for such a challenge for a number of years. They have accumulated about $8tn of foreign-exchange reserves, an increase of about $600bn since the end of 2024, based on Bloomberg calculations that also include Japan.
Those funds are being put to good use as the Iran war puts Asian currencies under pressure due to the dollar’s resurgence as a haven, the region’s exposure to soaring oil costs, and the risk of a global economic slowdown.
A number of Asian currencies have fallen but "we expect that downside risks may now be more limited, particularly as the authorities are likely to act against disorderly market moves,” said Clifford Lau, a fund manager at William Blair Investment Management in Singapore.
"Asian central banks have accumulated ample FX reserves over the past decade, providing substantial buffers to manage volatility and defend external positions,” he said.
Asian currencies slumped when trading began following the start of the Iran war on February 28, joining a rout in risk assets around the world. Since the crisis began, the South Korean won has dropped to the weakest level since 2009, and the Indonesian rupiah and Indian rupee have both sunk to record lows.
Central banks around the region have been quick to respond. Bank Indonesia pledged on March 4 to make "firm and consistent” intervention in both onshore and offshore markets to cushion the rupiah. While the currency fell to a record low on March 9, analysts expect the central bank will defend the 17,000-per-dollar level.
The Reserve Bank of India also intervened in both offshore and onshore markets to contain the rupee’s losses. The central bank said on March 6 it was buying 1tn rupees ($11bn) of bonds to support the currency.
Taiwan’s central bank stepped into the market this month due to large outflows, the head of the authority’s foreign-exchange department said March 5.
China’s yuan managed to eke out a small gain last week after the central bank strengthened its daily yuan fixing for a record 15th straight week. The fixing, known as the daily reference rate, is the midpoint around which the currency is allowed to trade each day.
The combined actions have helped temper currency declines, with the Bloomberg Asia Dollar Index losing just 0.5% last week, less than half as much as the week before.
"We think most Asian central banks retain sufficient net reserves to manage periods of FX volatility,” said Fesa Wibawa, an investment manager at Aberdeen in Singapore. "That said, the marginal cost of intervention inevitably rises the longer geopolitical tensions persist.”
There’s still one big factor that may lead to further currency losses — the potential for another upsurge in the price of oil.
An increase of $10 per barrel in crude may boost the US dollar by roughly 0.5% to 1%, according to Mitul Kotecha, a strategist at Barclays Bank Plc in Singapore.
"From an economic perspective, Asia gets hit a lot more because of the amount of oil that Asia imports,” he said in a Bloomberg Television interview last week. "The dollar, I think, remains at least in this environment, quite well supported.”
To offset that, positioning is starting to look favorable following the recent heavy selling. Significant outflows from Asia this month mean that many funds are now underweight, and may, at some stage, need to rebuild positions.
Global funds have pulled out about $31bn from eight emerging Asia equity markets in March, on track for the largest outflows since March 2020. They have also offloaded about $2.4bn of bonds from Thailand, Indonesia, India and Malaysia, the most since September.
"Investors entered this phase very well loaded on risk, but not in Asia, at least not on the currency side,” said Alessia Berardi, global head of macroeconomics at Amundi Investment Institute in London. The current positioning suggests there’s unlikely to be "a strong underperformance of these currencies in comparison with the others,” she said.