Investors flock to emerging-market currencies amid expectations of US rate cuts.
The Thai baht, Malaysian ringgit, and Indonesian rupiah have all surged as the US dollar weakens on growing expectations of a US Federal Reserve interest rate cut. From August 1 to September 12, the baht rose by 6%, while both the ringgit and rupiah saw gains of 5%. This shift reflects a broader trend, as global investors move into emerging markets to capitalize on the softer dollar, boosting Southeast Asian currencies.
The Malaysian ringgit hit a 19-month high this week, and the Philippine peso experienced its strongest gain in 18 years. Analysts attribute these gains to robust economic fundamentals and increased inflows into Malaysian equities and bonds. Narrower yield differentials with the US also bolstered the ringgit’s position, according to analysts at MUFG.
The Dollar Declines, Southeast Asia Rises
The weakening of the US dollar has provided a much-needed lift for Asian currencies. The anticipation of a US interest rate cut, with 65% of investors now expecting a half-point reduction, has fueled renewed optimism in emerging markets. However, not all currencies have shared in the rally equally. Indonesia’s rupiah and equities remained somewhat subdued, as the country’s central bank kept its interest rates steady.
As Alvin Tan, head of Asia FX strategy at RBC in Singapore, noted, “Asia’s growth and policy outlooks are varied, and this will give rise to varied FX performance.” While Southeast Asian currencies, led by the Thai baht and Malaysian ringgit, are expected to benefit, other currencies like the Chinese yuan and Indian rupee may lag.
Cautious Optimism Ahead
While the current environment favors Southeast Asian currencies, analysts warn of potential volatility. A smaller-than-expected US rate cut could lead to a reversal in currency gains, as investors may quickly return to the dollar. Additionally, some gains may be temporary, with Barclays strategists predicting limited appreciation in Asian currencies in the fourth quarter of 2024 before a possible reversal in 2025.
For now, however, the weakening dollar provides an opportunity for emerging markets, with Southeast Asian currencies showing resilience. Central banks in the region may also gain flexibility in adjusting interest rates without risking currency depreciation, as seen with Bank Indonesia’s recent rate cut, which did not weaken the rupiah.
As these countries continue to navigate global financial trends, the strength of their currencies will remain a key indicator of economic stability and investor confidence.
