(Bloomberg) -- The dollar’s relentless rally has finally toppled the last Asian currency standing, with the Indonesian rupiah joining regional peers in erasing this year’s gains against the greenback.
The rupiah succumbed via a modest weakening Tuesday, even after the central bank said it intervened to shore up the exchange rate. All other Asian currencies have already retreated this year against their US peer, which has advanced in 10 of the last 11 weeks.
“Higher US yields and stronger dollar have been the key driver of the rupiah’s recent weakness,” said Vijay Kannan, a macro strategist at Societe Generale SA in Singapore. “This should continue to be a headwind for bond flows and the rupiah.”
While most emerging Asia benchmark interest rates are seen at or near their terminal levels, there is a chance the Federal Reserve will hike even more. Like all the other currencies in the region, the rupiah has now become a victim of the higher-for-longer rate mantra which has given the dollar a new lease of life.
The moves in the US currency and bonds have spilled over into broader investor sentiment in Asia this week, with the regional equity gauge closing in on a correction from its July peak.
Asian currencies do not appear likely to erase losses in the near term. US overnight indexed swaps are pricing a one-in-three chance for another 25-basis point hike in November following hawkish rhetoric this week. China’s challenging outlook will also continue to weigh on the region’s trade-dependent economies.
The yen, the Malaysian ringgit and Thailand’s baht are among the worst performers this year, while the Taiwan dollar is trading at its weakest since 2017 against the greenback.
For the rupiah, capital outflows have also weighed, and a narrowing yield differential with the US sapped the appeal of local currency bonds. Indonesia’s policy rate is offering only a 25 basis point premium over the upper bound of the Fed fund target rate.
The rupiah dropped as much as 0.5% against the dollar on Tuesday, losing all its gains after rallying over 6% in the first four months of the year. But despite the losses, it remains Asia’s best performer in 2023.
Bolstering the rupiah is policymaker efforts to defend the currency. Bank Indonesia intervened in both the spot and domestic non-deliverable forward markets to balance supply and demand, as well as maintaining expectations, according to Edi Susianto, executive director for monetary management.
“Bank Indonesia’s defense is likely no silver bullet and likely limited to smoothing moves,” said Audrey Ong, a strategist at Barclays Bank Plc.
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