Asia faces flight of funds as greenback strengthens

Asia faces flight of funds as greenback strengthens

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.

The US central bank also signalled 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 4.4805 against the US dollar yesterday, the greenback's strongest level against the Malaysian currency since a record of 4.8850 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 yesterday.

This is up from S$1.4237 last Wednesday - the day the rate hike was announced - and S$1.3901 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 labour market.

The Fed also said it expects to raise rates three times next year, instead of two as projected before the presidential election.

Regional currencies have been depreciating sharply against the greenback on expectations that higher interest rates, as well as US President- elect Donald 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, Mr 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".

Analysts expect the US dollar to remain strong against Asian currencies in the coming year - which means US imports will be pricier.

For Malaysia - a major oil exporter - the recovery in oil prices could help lift the ringgit, said Mr Chia.

This article was first published on Dec 20, 2016.
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