Asian Central Banks Deploy New Currency Defense Tactics as Oil Risks and High US Rates Strain Reserves

Central banks across emerging Asia are increasingly adopting unconventional tactics to shore up their currencies while conserving foreign-exchange reserves. The shift comes as a potent mix of Middle East tensions, elevated oil prices, and the prospect of sustained high US interest rates keeps the region’s policy makers on alert.

India has lured nearly $40 billion from its diaspora through high-yield dollar deposits, helping the rupee recover from a record low hit in May. South Korea’s push to accelerate corporate dollar repatriation has propelled the won to its biggest monthly gain since 2022. Indonesia drew $1.6 billion in bond inflows over the past two months by offering incentives to foreign funds, and Taiwan has been instructing exporters to sell US dollars at times of currency weakness.

These measures broaden the toolkit for policy makers, supplementing traditional tools such as interest-rate hikes and direct foreign-exchange intervention. Those classic defenses formed the first line of response after the Middle East conflict sent oil prices soaring, exposing emerging Asia’s heavy reliance on energy imports. While oil prices have since eased on signs the US and Iran are nearing a deal, several Asian currencies remain among this year’s worst performers.

“There are a variety of motivating factors, but they essentially come down to preserving FX reserves as best as possible amid structurally higher volatility and uncertainty,” said Claudio Piron, head of Asia FX and rates strategy at BofA Global Research. “Additionally, they are trying to balance the needs of protecting FX stability, while maintaining domestic liquidity. Attracting inflows is a key strategy to achieve this goal.”

Indonesia’s rupiah, the Indian rupee, and Thailand’s baht rank among the five worst performers in a basket of 22 emerging-market currencies tracked by Bloomberg. By contrast, Latin American currencies — led by the Colombian peso, Brazilian real, and Mexican peso — occupy the top of the rankings. The region offers higher interest rates than most of its developing-nation peers, and many of its countries are oil exporters, making them relatively insulated from the impact of higher oil prices.

“On a total-return basis, Latin American currencies may retain an advantage because of their higher carry,” said Desmond Fu, head of investment management at Western Asset Management in Singapore. “On a spot basis, however, selected Asian currencies could close part of the gap if US yields stabilize, energy-market disruption doesn’t intensify and the AI investment cycle continues to support technology exports and regional capital expenditures.”

Several analysts, including those at Alpine Macro, State Street Investment Management, and M&G Investments, noted that the extent of weakness in Asian currencies has been surprising given a mix of positives such as trade surpluses, solid macroeconomic fundamentals, robust exports, and buoyant equity markets across the region.

“This suggests that the imbalance lies more in the composition of capital flows than in trade fundamentals, meaning FX intervention alone may not be sufficient to address currency weakness,” said Low Guan Yi, head of Asia fixed income at M&G, according to Business Standard. “Against this backdrop, we expect policymakers to continue broadening the sources of foreign currency inflows.”

Traditional Defenses Remain in Play

Emerging Asia’s central banks are not abandoning conventional tools. Bank Indonesia raised interest rates by 100 basis points in May and June and has continued to intervene in the currency market, much like its Indian peer. The two countries, along with the Philippines and Thailand, have experienced Asia’s biggest drawdowns in FX reserves since the start of the Iran war, with declines of 4% to 9%.

Authorities in the Philippines have raised rates by 50 basis points, and the Bank of Korea tightened policy for the first time in three years last month. MUFG Bank Ltd. is forecasting two more increases by Indonesia and the Philippines, and at least one more hike by the Bank of Korea this year, according to Business Standard.

In Japan, Asia’s biggest developed market, policy makers are leaning more heavily on foreign-exchange intervention. The first joint yen-buying operation between Japan and the US since 1998 recently helped spur one of the yen’s most notable rebounds.

US Policy Remains Key Risk

The path of US monetary policy continues to be a critical factor for investors. Three Federal Reserve officials dissented from last month’s decision to hold interest rates steady, warning that waiting too long to act against inflation could risk the need for even more aggressive policy moves later.

“Asian central banks are keeping more firepower given the greater uncertainty around global events including how oil prices, El Nino, US yields and the dollar may eventually pan out,” said Michael Wan, a senior currency analyst at MUFG Bank in Singapore, as reported by Business Standard. “Attracting more dollars will be one prong of the strategy.”

The new tactics reflect a broader recognition that preserving foreign-exchange reserves is paramount amid heightened uncertainty. By diversifying their sources of dollars, emerging Asia’s central banks are attempting to maintain currency stability without depleting the ammunition they may need for future shocks.