Trump power deflating Asian currencies
US President-elect’s ‘America First’ agenda has buoyed the buck and torpedoed China, India and Japan’s currencies and prospects
The US dollar’s sharp appreciation after President-elect Donald Trump’s election win is hitting Asian currencies, with the Chinese yuan, Japanese yen, Indian rupee and Korean won now all plumbing multi-year lows.
That’s raising significant concerns about imported inflation and the challenges higher-priced goods will pose to regional governments and central banks’ economic and monetary policymaking.
For Asian economies, where the US is a key trade partner and many commodities—notably oil—are priced in dollars, a weaker local currency inflates the cost of imports. This imported inflation trickles down to consumer prices, raising the cost of living and eroding purchasing power.
In China, a depreciating yuan exacerbates inflationary pressures on key imports such as semiconductors and agricultural products, which are critical to its manufacturing sector and food supply chain.
Similarly, in South Korea, the won’s depreciation not only raises the cost of imported energy and raw materials but also threatens to erode the profitability of export-oriented industries, as higher production costs offset the competitive advantage of a weaker currency.
A key concern for policymakers is how currency-induced inflation can spiral.
When businesses and consumers anticipate that prices will continue to rise, they often adjust their behavior—companies may increase prices preemptively, while households might accelerate purchases anticipating higher future prices.
This dynamic can create a feedback loop where inflation expectations become self-fulfilling, complicating central banks’ efforts to maintain price stability.
In India, where the rupee’s depreciation has already led to higher costs for essentials like fuel and edible oils, inflationary expectations are particularly problematic.
The Reserve Bank of India (RBI) has worked to anchor inflation expectations through interest rate management, but a prolonged currency slump risks undermining these efforts.
Thus, central banks across Asia face a stark policy dilemma. To combat imported inflation, raising interest rates is the textbook response. However, higher interest rates can dampen economic growth by making borrowing more expensive for businesses and consumers.
Monetary dilemmas
For economies already grappling with serious challenges, such as China’s slowing economic growth and Japan’s persistent deflationary pressures, tightening monetary policy carries significant risks.
Take Japan, for example. The Bank of Japan (BOJ) has maintained an ultra-loose monetary policy for years to combat deflation. However, the yen’s steep decline against the dollar has pushed import prices higher, forcing the BOJ to confront inflationary pressures without jeopardizing a fragile economic recovery.
The question is whether Japan can afford to normalize its monetary policy without triggering a recession—a risk that also looms over other Asian economies.
The current wave of currency depreciation is not happening in isolation. It reflects broader global trends, including the Federal Reserve’s monetary tightening, which has made the dollar more attractive to investors seeking higher yields.
This capital outflow from emerging markets has put additional pressure on their currencies. At the same time, geopolitical tensions and trade policy uncertainties, both exacerbated by Trump’s threatened tariffs and ‘America First’ agenda, have heightened volatility in currency markets.
Asian central banks, therefore, must contend not only with domestic inflationary pressures but also with external factors well beyond their control.
Intervention in foreign exchange markets, such as selling dollar reserves to prop up local currencies, is an option but comes with its own set of risks, including depleting reserves and undermining investor confidence.
The way forward for many Asian economies may lie in a combination of short-term monetary measures and long-term structural reforms.
Central banks could adopt targeted interventions to stabilize currencies while coordinating with governments to address supply-side issues. For instance, reducing dependency on imported energy through investments in renewable energy could mitigate the impact of future currency fluctuations.
In India, measures to boost domestic production of essential goods—a cornerstone of the “Make in India” initiative—could reduce reliance on increasingly costly imports.
Similarly, China’s efforts to bolster self-sufficiency in semiconductors and other high-tech industries may shield it from the worst effects of currency-driven inflation over the long term.
For Asian economies, the challenge is not merely to weather the immediate inflationary pressures but to build resilience against future shocks. This requires a delicate balancing act of managing monetary policy to curb inflation without stifling growth while simultaneously addressing structural vulnerabilities.