Asia Fears Flight of Funds
Asian currencies have weakened considerably against the surging greenback in the wake of the United States Federal Reserve’s decision last week to raise a key interest rate for the first time in a year.
This is prompting investors to shift money out of emerging markets and into US dollar-denominated assets, putting pressure on Asian currencies and asset markets, news outlets reported.
The US central bank also signaled that interest rates will go up in the coming year faster than previously expected—a policy stance set to result in regional currencies staying soft against the US dollar.
The ringgit has been among the worst hit, slumping to 4.480 against the US dollar Monday, the greenback’s strongest level against the Malaysian currency since a record of 4.885 in January 1998 during the Asian financial crisis. It has since recovered slightly to about 4.475 per US dollar.
The US dollar has also surged to its highest level in seven years against the Singapore dollar, reaching S$1.449 Monday.
This is up from S$1.423 last Wednesday—the day the rate hike was announced—and S$1.390 on Nov 8, just before the US presidential election results.
The South Korean won, Philippine peso and Japanese yen--among others—have also dropped against the US dollar.
These currency moves come after the US Fed raised the benchmark federal funds rate—the rate banks charge one another for overnight loans—last Wednesday for the first time this year, by a quarter of a percentage point, citing an improving US economy and labor market.
The Fed surprised markets by forecasting three interest rate hikes next year, and that number could increase even more once president-elect Donald Trump takes office, CNBC reported.
Regional currencies have been depreciating sharply against the greenback on expectations that higher interest rates, as well as Trump’s policies to ramp up government spending, will trigger capital outflows from emerging-market economies, said United Overseas Bank currency strategist Peter Chia.
In addition, Trump’s campaign promises to ramp up government spending—if translated into actual policies—are expected to increase inflation and boost growth in the US. This would put pressure on the Fed to hike interest rates more aggressively to keep prices under control.
Credit ratings agency Moody’s has flagged markets such as Mongolia, Sri Lanka, Malaysia, Hong Kong, Singapore and Taiwan as the most vulnerable to the direct and indirect effects of sustained capital outflows.
However, it noted in a report last week that Singapore, Hong Kong and Taiwan have “fiscal space to buffer negative shocks”.
For Malaysia—a major oil exporter--the recovery in oil prices could help lift the ringgit, Chia said.
Chinese Snap Up USD Funds
Chinese savers, eager to convert their yuan before the currency’s depreciation continues further, are snapping up US dollar investment products that offer options for keeping money at home instead of sending it overseas.
The latest wealth management products from China Merchants Bank in Shanghai last week, paying 2.37% annual interest on US dollars, sold out in 60 seconds flat.
The growing number of offerings of such US dollar funds and how quickly they are being purchased show the surging demand for foreign currency amid outflows that are estimated to have totaled more than $1.5 trillion (S$2.17 trillion) since the beginning of 2015.
By shifting into dollars—US, Australian and Hong Kong are among the favorites—deposit holders in China are shielded from the yuan’s losses without having to take their money out of the country to seek returns.
Asian shares were sold down Monday as the strong US dollar sucked capital out of regional markets, a trend that some analysts suspect may continue. A strong US dollar usually attracts fund flows from Asia back to US assets. This happened, with Shanghai down 0.16% and Hong Kong slipping 0.85%. Tokyo eased 0.05%.