The taboo surrounding FX intervention has been broken in Asia.

The strength of the US dollar is evident when it is directly spoken about rather than implied or hinted at. This is currently the situation in certain regions of Asia, despite the popular belief that their economies are becoming less dependent on the US.

Raising interest rates is a commonly used but difficult way to prevent the decline of local currencies, which is driven by the Federal Reserve’s hawkish stance. Last quarter, the yen decreased by 3.4% and approached the threshold that led the Ministry of Finance to intervene in the market almost a year ago. Meanwhile, Indonesia is attempting to draw in foreign investments to strengthen the rupiah. The Philippines is also showing reluctance towards the peso falling below P57 per dollar.

Federal Reserve officials have not shown strong certainty about increasing interest rates, but they are emphasizing that borrowing will remain expensive for a longer period of time. This is not certain.
This is beneficial for Asian bankers who would rather have a method of handling the consequences that does not hinder progress.

The worldwide economy is slowing down and leaders are cautious about tightening too much. This means that jumping into the market is a risky but possible option. In the past, this was a common way to handle unwanted changes in exchange rates, but it became less popular before the pandemic. However, using state transactions to influence exchange rates has become less taboo in recent times.     

It is commonly claimed that involvement is destined to be unsuccessful. However, there are situations where it can be beneficial. The key to achieving a favorable result goes beyond simply knowing when to make a purchase. Goals must be clearly defined and aligned with wider economic policies. Without this, a satisfactory resolution may be difficult to attain.

If the goal is to convert a significant decrease in exchange rates into a lasting upswing, intervention is not the most suitable approach. If the objective is to delay actions and cause those who are bearish to reconsider their wagers, there is a chance for the government to strategically succeed. However, Asian officials will likely require assistance from Jerome Powell, whom they consider a friend. The Federal Reserve should explicitly state that it has stopped raising interest rates and continue repeating this message until it is widely understood. During his prepared speech on Friday, New York Fed President John Williams attempted to convey this message, but it deserves further emphasis.fication.

It’s worth looking at the case of the Philippines. Manila’s actions around a year ago, when the dollar was on a tear, are instructive. Rarely does a nation whose currency is under siege spell out a specific level that’s a no-go zone. But that is what Manila did, drawing a line at P60 per greenback. The specificity was surprising; not even big economic powers with reserve currencies like the eurozone, the UK, Japan, or even China, are so blunt.

Japan purchased yen at a difficult time, alongside the struggling peso.fi

For the first time in a long time, Switzerland stopped using negative interest rates and the British pound’s decline led to the downfall of a prime minister. The P60 line remained stable. Was the Philippines smart or did they just have good luck?

A speech given by former Federal Reserve Vice Chair Lael Brainard on September 30, 2022, which did not receive enough recognition, may have had a significant impact. Brainard, who currently serves as the top economic advisor to President Joe Biden, acknowledged the potential risks of financial instability. She restated the Fed’s stance that inflation was too high and more interest rate hikes were necessary, but emphasized the need for a cautious approach. She also hinted at the Fed’s shift from increasing rates by half-point or three-quarter-point increments to 25-basis point increments. As a result, the dollar stabilized and it was predicted that 2023 would be a relatively calm year.

However, things have not gone according to plan. What is the response of the Philippines? Officials are indicating that they will buy pesos at approximately P57 per dollar. The central bank is not ruling out the possibility of a rate hike outside of the usual schedule. This may or may not happen, but keeping the possibility open does not have a negative impact on controlling the currency.

The reason for the decrease in the value of the yen was due to Bank of Japan Governor Kazuo Ueda retracting comments he made in an interview with the Yomiuri newspaper at a press conference on September 22. The interview was seen as an attempt to bolster the currency by hinting at the possibility of ending negative rates by December.

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Japan has decreased its involvement in foreign exchange (FX) activities compared to the 1990s and early 2000s. The return of Eisuke Sakakibara, the former high-ranking official in the Ministry of Finance, is a clear indication that the “I” word is being discussed. He is known as “Mr. Y.” 

Sakakibara praised the MOF for being prepared to intervene during his time in office. He stated to Paul Jackson of Bloomberg News that if the yen remains stable at around ¥155 to the dollar, authorities will likely attempt to withstand the current situation.

The most intriguing aspect of the interview was his perspective on how to improve the current situation. It was speculated that a change in the Federal Reserve’s position following the December meeting of the Federal Open Market Committee, along with a potential increase in Japanese rates next year, could lead to a surge towards 130. However, until then, everyone else must tolerate the Fed’s rates. Smiling is a personal choice.

BLOOMBERG OPINION