Asia's Forex Intervention May Prove Futile

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NEW YORK: Asian central banks have sold US dollars in recent sessions in an attempt to rescue their battered currencies, but their efforts may prove futile against a resurgent greenback that has caught fire after a seven-year decline.

Many Asian currencies, which enjoyed a good run last year, have been hammered since late July, as the dollar soared amid concerns over capital outflows and slower economic growth in the region.

Weakness across the region's currencies has sparked moves by Asian central banks to prop up their currencies against the greenback. Authorities in Thailand, Malaysia, Indonesia, India and the Philippines were spotted selling dollars in the foreign exchange market this week. South Korea intervened on Friday for a third day to defend the struggling won.

But so far, these attempts have been unsuccessful as the dollar's surge is just too strong to overcome, analysts say. "At this point, they're (central banks) not trying to reverse it," said Win Thin, senior currency strategist at Brown Brothers Harriman in New York. "There is no way they can do it. The dollar is gaining across the board."

"But they are trying to sort of slow the move," Thin said. "They just want to make sure the market remains orderly." Plunging oil prices, worsening global prospects, and expectations of eventual U.S. interest rate increases have underpinned a month-long recovery in the dollar.

In contrast, macroeconomic fundamentals, which had supported Asian currency strength in the past, have deteriorated, with a global slowdown putting more pressure on the region's economic outlook.

Authorities in South Korea have sold $30 billion in 2008 to boost the currency. Yet the won has fallen about 19.4 percent so far this year, according to Reuters data, the worst-performing currency in Asia. South Korea's economy, heavily reliant on commodity imports, felt the full brunt of soaring prices.

Dollar-selling by Korea's central bank over the past three days has given the won some breathing room, but it remains under heavy selling pressure amid a deteriorating economic backdrop.

"With export growth hitting a brick wall in the month of August, speculators believe that South Korea's economy is headed downhill," said Kathy Lien, director of currency research at GFT Forex in New York. "Past interventions by South Korea have been futile. History indicates that the market is always right."

Asia struggles

Aside from the won, the Thai baht has also struggled, with a drop of 15.6 percent so far this year, along with the Philippine peso, down 13.7 percent.

A sizable depletion in reserves may be a sign a central bank is protecting a fundamentally weak currency, Morgan Stanley said in a research report, citing the Bank of Korea, State Bank of Pakistan, and Bank of Thailand.

Up until recently, Asian central bankers had been mostly concerned about currency strength. They had sold their currencies and bought the dollar, keeping their currencies at artificially low levels to boost the competitiveness of their exports in the global market.

Over the past year, some Asian countries have scaled back intervention, using their strong currencies to temper rising inflation fueled by soaring commodities prices. But things have changed dramatically in recent weeks. As commodity prices eased and global growth slowed, the focus for Asian countries has shifted from curbing inflation to boosting the economy, analysts said.

"They are seeing more signs of growth weakness. The markets are also much more aware of the fact that the rest of the world is slowing down," Brown Brothers' Thin said. "I think a lot of these Asian exporters are now very concerned about growth."

For this reason, analysts argued that Asian central banks may be comfortable with some currency weakness. Asia will likely take a major hit ahead as the world's economies decelerate, said Stephen Jen, global head of currency research at Morgan Stanley in London.

He thinks most Asian currencies, excluding the yen, could fall another 10 percent or more, with the won and the Indian rupee the most vulnerable.

However, "Asia is different from Europe...if and when the world slows, the policy focus in Asia would very quickly shift from inflation to growth," Jen said. "This means that monetary and credit policies will ease, and weaker currencies will be welcomed in Asia; interventions will be curtailed."