Emerging Asia Central Banks Rethink Currency Defense as Reserves Under Pressure

Central banks across emerging Asia are broadening the tools they use to support their currencies, shifting away from heavy reliance on foreign-exchange reserves as geopolitical risks and elevated US interest rates persist. The new measures range from luring diaspora dollars to ordering exporters to sell greenbacks, according to Bloomberg.

India has attracted nearly $40 billion from its diaspora through high-yield dollar deposits, a move that helped the rupee recover from a record low hit in May. South Korea’s push to accelerate corporate dollar repatriation contributed to the won’s biggest monthly gain since 2022. Indonesia drew $1.6 billion in bond inflows over the past two months by offering incentives to foreign funds. Taiwan, meanwhile, has instructed exporters to sell US dollars during periods of currency weakness.

These tactics supplement traditional defenses such as interest-rate hikes and direct foreign-exchange intervention, which policymakers deployed as the first line of response after the Middle East conflict sent oil prices soaring. The oil spike exposed emerging Asia’s heavy reliance on energy imports, making the region one of the weakest pockets of the global currency market. While crude prices have since eased on signs the US and Iran are nearing a deal, several Asian currencies still rank 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.”

**Reserve drawdowns and rate hikes persist**

Despite the new approaches, emerging Asia’s central banks have not abandoned traditional tools. Bank Indonesia raised interest rates by 100 basis points in May and June and continued intervening in the currency market, as did its Indian counterpart. The Philippines and Thailand have also seen significant reserve declines. Since the start of the Iran war, Asia’s biggest drawdowns in foreign-exchange reserves — ranging from 4% to 9% — have occurred in India, Indonesia, the Philippines, and Thailand, according to Bloomberg data.

The Philippines 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.

Japan, Asia’s largest developed market, is leaning more heavily on direct intervention. The first joint yen-buying operation by Japan and the US since 1998 recently helped trigger one of the currency’s most notable rebounds.

**Latin America outperforms on carry and oil exports**

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

**Capital flow imbalance, not trade fundamentals**

Several analysts — including those at Alpine Macro, State Street Investment Management, and M&G Investments — say the extent of weakness in Asian currencies has been surprising given a mix of positives: 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. “Against this backdrop, we expect policymakers to continue broadening the sources of foreign currency inflows.”

**US policy path remains key**

The trajectory of US monetary policy remains a critical factor for investors, especially after three Federal Reserve officials dissented from last month’s decision to hold interest rates steady. The dissenters warned that waiting too long to combat 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. “Attracting more dollars will be one prong of the strategy.”

Policymakers face a delicate balance: preserving foreign-exchange reserves while maintaining currency stability and domestic liquidity. The new toolkit — diaspora bonds, repatriation incentives, and targeted bond inflows — offers a way to do both, but the success of these measures depends on global conditions that remain highly uncertain.