Dollar dominance sparks intervention concerns across markets, Asia in focus

Investors are dusting off intervention playbooks once again as a resurgent dollar raises the spectre of fresh efforts.

The recent resurgence of the U.S. dollar is prompting concerns and speculation about possible interventions by central banks across Asia, particularly in nations where currencies have weakened significantly against the greenback. As the Bloomberg dollar gauge has risen about 2% this year, investors are revisiting intervention playbooks in anticipation of measures to stabilize and protect local currencies.

Taiwan’s central bank recently issued a rare statement to reassure investors amid a sell-off in the local currency and stocks. A South Korean official expressed concerns about the won’s excessive weakness, and China’s central bank has maintained robust support for its currency. There is growing speculation that Japan’s yen could be the next target for intervention.

Asia is particularly vulnerable, with the region housing the two worst-performing major currencies against the dollar. The yen has depreciated more than 4% this year, nearing the 150-per-dollar level, prompting fears of intervention. The win has reached its lowest point since November, and Taiwan’s dollar has experienced a 1.5% decline in a single week.

Analysts suggest that central banks with stronger financial positions, such as South Korea and Japan, maybe more proactive in intervening to stabilize their currencies. On the other hand, countries with weaker current accounts and fiscal deficits, like India and Indonesia, could face challenges in supporting their currencies if the dollar’s strength continues.

“We expect the Bank of Korea and the People’s Bank of China to smooth market volatility,” noted Lemon Zhang, a strategist at Barclays Bank. South Korea’s central bank might take more assertive measures, potentially leading to a broader trading range for the dollar-won pair.

As the dollar’s recent ascent surprises investors and poses risks to vulnerable currencies, central banks in the region are closely monitoring the situation and may resort to intervention strategies to mitigate volatility and safeguard their economies.