Since November 5 last year, the U.Sdollar index has seen an impressive rise of 5.39%. This persistent strengthening of the dollar has caused many major currencies in the Asia-Pacific region—such as the Japanese yen, South Korean won, and Indian rupee—to plummet to their lowest exchange rates against the dollar in yearsMarket analysts suggest that, despite the theoretical advantage of devaluation in increasing export competitiveness amidst tariff threats, this situation simultaneously amplifies fears of imported inflationSuch concerns complicate the monetary policy decisions that central banks in the Asia-Pacific region will have to weigh in 2025 as they consider the impacts of inflation while attempting to stave off speculative bets against their weakening currencies.

The minutes from the Federal Reserve's recent meeting indicate that officials are apprehensive about inflation and its potential effects on monetary policy, advocating for a slowdown in interest rate cuts

This stance has led to widening spreads between U.STreasury yields and bonds from Asian economies, further diminishing Asian currencies' standingConsequently, central banks in Asia, including the Bank of Japan and the Reserve Bank of India, are compelled to conduct foreign exchange interventions to stabilize their currencies.

James Ooi, a market strategist at the online brokerage Tiger Brokers, highlights the increased complexity that a strong dollar brings to the management of Asia-Pacific central banksFor instance, Japan's central bank had already expended over 15.32 trillion yen (approximately $970.6 billion) by mid-2024 to stabilize the yen, which had dropped to a multi-decade low of 161.96 yen per dollar in JulyHowever, even with such robust interventions, the yen has recently slid close to 158, marking the lowest level since July of the previous year

• Tesla Finally Strikes Back
• What’s Next for the Dollar?
• NVIDIA Becomes a Trendsetter at CES
• Morning Brief FM | January 11, 2025
• Stocks Slide as Rate Hike Fears Ease

In response, Japanese finance officials have repeatedly voiced concerns regarding the yen's "one-sided" and "volatile" movementsWhile a strong dollar may assist the Bank of Japan in reaching its inflation target—a target that has seen inflation levels exceed 2% for the past 32 months after a prolonged period of deflation—there is an underlying apprehension that a weakening yen could trigger imported inflation.

The challenge for Japan lies in ensuring that the rate of price and wage increases does not exceed the acceptable thresholds as set by the Bank of JapanMeanwhile, in South Korea, the central bank has also initiated foreign exchange interventions amidst ongoing political turmoilThe exact amounts remain undisclosed, yet market estimates suggest these measures will drive South Korea’s foreign reserves down to their lowest levels in five years.

The South Korean won remains on a steady decline against the dollar, having dipped to around 1,476 won per dollar in December, marking its lowest value since 2009. Despite this depreciation, the Bank of Korea appears to prioritize stimulating domestic economic growth

In an unexpected move last November, the central bank cut interest rates by 25 basis pointsAcknowledging the heightened volatility in exchange rates, the bank noted, "While the volatility in the exchange rate has increased, the downward pressures on economic growth are more pronouncedTherefore, it is appropriate to further lower the benchmark rate to alleviate the risks of economic downturn." However, political instability following the unexpected announcement and subsequent retraction of martial law by then-President Yoon Suk-yeol effectively countered any positive impact from the rate cutThus, the Bank of Korea found it necessary to convene an emergency meeting on December 4, 2024, pledging to provide "adequate liquidity" until financial and foreign exchange markets stabilize, with these measures expected to last until the end of February this yearRecently, the exchange rate has slightly rebounded, with the dollar trading at 1,463.73 won.

Turning to India, the country finds itself in a precarious situation amid the worrying trend of currency depreciation

The Indian rupee has fallen behind all major currencies in Asia, experiencing immense pressure from a strong dollar coupled with foreign investors selling off Indian assets in October and November of the previous yearOn January 8, the rupee tumbled to a historical low of 85.86 against the dollar and marginally worsened to 85.88 the day after, showing no signs of recovery.

The Reserve Bank of India (RBI) is facing significant pressure, arguably more than other major central banks in the Asia-Pacific regionEven without accounting for the inflationary pressures from currency depreciation, the RBI's limit for an inflation rate was breached last October when inflation soared to 6.21%—the highest level since the previous quarter's 5.4% GDP reading fell below expectations, indicating the slowest quarterly growth rate since the fourth quarter of 2022. During its last monetary policy meeting in December, the RBI ultimately decided to maintain interest rates at 6.5%, but dissent emerged within the committee, with two members voting for a 25 basis point cut

Under the strain of economic slowdown, currency depreciation, and rising imported inflation, market expectations are leaning toward the possibility that the RBI will return to prioritizing growth over currency stability by lowering rates further to stimulate the economy, thus perpetuating the rupee's downward trend.

Ken Peng, head of Asia-Pacific investment strategy for Citi Wealth, shared a more optimistic perspective in his outlook report for 2025. He acknowledged the RBI's ability to handle potential sudden capital outflows and significant rupee depreciation, emphasizing that "the RBI’s substantial foreign exchange reserves afford the rupee greater stabilityThe only currencies with less volatility are those pegged to the dollar, such as the Hong Kong dollarThis should provide a sense of relief to many foreign investors considering this market."

As the complexities of foreign exchange markets unfold, it becomes increasingly clear that monetary policies in the Asia-Pacific region are grappling with challenges that intertwine political, economic, and social facets