Why are the currencies of many countries “continuously falling”? , Japanese yen and South Korean won followed closely, depth | Turkish lira "led the decline"

In recent times, from developed economies to emerging market countries, the exchange rates of the local currencies of many countries against the US dollar have fallen sharply, and the currencies of many Asian countries have been swept by a "depreciation storm."

What are the reasons behind the "continuous decline"? How are the world's major currencies trending? What impact will the "devaluation wave" have on the global economy?

The past 27th was the first day of Japan’s Golden Week holiday. However, some Japanese people who are preparing to travel abroad are not happy.

As the yen continues to depreciate, they have to find ways to save money. Some plan to prepare their own convenience food, and some simply decide to skip a meal.

On the previous day, the 26th, the Bank of Japan decided to maintain the current monetary policy unchanged and failed to implement quantitative tightening as expected. As a result, the exchange rate of the yen against the US dollar in the Tokyo foreign exchange market fell below 158 yen per US dollar, once again setting a new low since May 1990. level.

In fact, the weakness of the yen is just a microcosm of the recent decline in currencies of many countries.

Data show that from the beginning of this year to the middle of this month, the currencies of the major economies of the Group of 20 except the United States - whether developed economies or emerging market countries - were depreciating against the US dollar.

"Leading the decline" was the Turkish lira, which fell by 8.8%. The Japanese yen and South Korean won followed closely, falling 8% and 5.5% respectively. The Australian dollar, Canadian dollar and euro fell 4.4%, 3.3% and 2.8% respectively.

From a geographical perspective, the currencies of major Asian economies are under significant pressure.

Hideo Kumano, chief economic analyst at Japan's Dai-ichi Life Economic Research Institute, said the yen's exchange rate against the U.S. dollar fell below a key level. Even if the Kishida government intervenes now, the room for maneuver will be very limited.

In South Korea, the exchange rate of the Korean won against the U.S. dollar fell below the 1,400 won mark during intraday trading in the middle of this month, marking the third time in recent years that it has touched this iconic mark.

A Bank of America research report pointed out that the outlook for the South Korean won has "changed significantly" after the Federal Reserve delayed the timing of interest rate cuts and geopolitical risks in the Middle East became major negative factors.

In South and Southeast Asia, Asian currencies such as the Indian rupee, Indonesian rupiah, Malaysian ringgit, Vietnamese dong, and Philippine peso have continued to move out of the downward curve.

Indonesia's central bank recently raised three major interest rates by 25 basis points. However, the outside world has questioned the effectiveness, because the Bank of Indonesia has taken many actions, but failed to prevent the Indonesian rupiah from depreciating by more than 5% since the beginning of the year.

Also taking action is the Central Bank of Vietnam. The Vietnamese dong has depreciated nearly 5% this year. Vietnam's central bank has sold dollars to some banks.

According to public opinion, the strength of the U.S. dollar has become a major concern for countries around the world, sounding the alarm not only in emerging economies but also in developed industrialized countries.

Why did this “tide of depreciation” of local currencies spread to many countries?

Tan Yaling, an independent economist at the China Foreign Exchange Investment Research Institute, believes that the main reason is the so-called "strong U.S. dollar."

For some time, the Federal Reserve's policies have led to a sharp appreciation of the U.S. dollar and the return of capital from emerging markets, exacerbating the risks faced by emerging economies and the world economy.

In the middle of this month, the Federal Reserve's hint that it was not in a hurry to cut interest rates became a direct cause of the sharp depreciation of Asian currencies. Previously, the market generally believed that the Federal Reserve would cut interest rates this year.

Tan Yaling said that from the perspective of pricing mechanism, the world's major currencies are pegged to the US dollar, or to a basket of currencies led by the US dollar. Under this system, the appreciation of the US dollar will naturally trigger the depreciation of other currencies. It cannot escape this cycle and logical relationship.

Another major driver of this round of "devaluation" is the depreciation of the Japanese yen.

Tan Yaling said that compared with European currencies, the depreciation of Asian currencies is more serious this time, because the latter is also affected by the depreciation of the Japanese yen. "Asian countries have relatively close financial and trade ties with Japan, and their currency trends are inevitably affected by the yen. The depreciation of the yen and the appreciation of the US dollar have stimulated the depreciation of Asian currencies."

Some commentators believe that this round of depreciation of the yen was triggered on the one hand by the aggressive interest rate hikes in the United States, and on the other hand by long-standing structural problems in the Japanese economy. These factors include Japan's heavy reliance on imports of important resources, the continued increase in demand for U.S. dollars, the continued deficit in trade in goods and services, and the tendency for less repatriation funds from overseas investments.

In addition to being affected by the US dollar and the yen, the depreciation of local currencies in Asian countries is also related to two other factors.

One is the transfer of funds, with more funds turning to developed country stock markets to hunt for dips. Second, the capital value and economic scale of Asian countries still lag behind developed economies, and market openness and market system integrity are not yet sufficiently attractive to international capital.

Looking at the trend of major global currencies, Tan Yaling believes that considering that the Federal Reserve will cut interest rates in the future, the U.S. dollar will depreciate, and the U.S. economic performance also supports the trend of U.S. dollar depreciation.

Currently, investors are "betting" that the Federal Reserve will decide whether to cut interest rates after its monetary policy meeting on November 6-7. This time point happens to be just after the US election voting day on November 5.

Regarding the Japanese yen, Tan Yaling pointed out that the extreme depreciation of the Japanese yen is in line with the US dollar and does not mean that the Japanese economy is not good. In her view, the Japanese stock market can support the appreciation of the yen, but due to the influence of interest rate arbitrage, it still shows technical depreciation of the local currency and actually contains appreciation potential.

As for the RMB, it has shown strong resilience in the foreign exchange market. Tan Yaling believes that there may be an alternation between appreciation and depreciation this year, and there may be devaluation throughout the year, but the excessive depreciation against the US dollar will be repaired through RMB appreciation in the interim. The central bank has previously mentioned that it must prevent the risk of exchange rate overshooting and maintain the basic stability of the RMB exchange rate at a reasonable and balanced level.

In addition, analysts predicted the prospects for other Asian currencies.

Analysts believe that successive personnel changes in Vietnam's top management and the difficulties in the real estate industry have stimulated the country's demand for U.S. dollars and gold. The exchange rate of the US dollar against the Vietnamese dong is expected to adjust to 1:25,700 before the end of the year.

The baht is also vulnerable to geopolitical tensions, with Bank of America lowering its forecast for the dollar-to-baht exchange rate by year-end to 1:37, taking into account rising oil prices and freight costs.

How do you view the impact of this round of “devaluation”?

Tanya Ling believes that currency depreciation will first harm emerging market countries. Although the depreciation of local currencies in developing countries is beneficial to export trade, if a country's capital market is not sound or the position of foreign investment is not particularly certain, capital outflows will have a greater impact on the country's economy.

Data from the International Monetary Fund shows that if the U.S. dollar appreciates by 10% in the foreign exchange market, the real GDP of emerging economies will fall by 1.9% after one year, and the negative impact on the economy will last more than two years.

For different countries or regions, the "devaluation wave" will also bring different negative impacts.

For Japan and South Korea, since their economies rely on imports, the depreciation of their local currencies will exacerbate imported inflation, push up import costs, and put pressure on consumption. A depreciation of the local currency will also trigger capital outflows and disrupt financial markets.

In countries such as Indonesia and Vietnam, due to high current account deficits, inflation rates and foreign debt levels, the depreciation of the local currency has made it more difficult to repay the huge foreign debt and interest, posing greater risks to economic stability.

In Latin America, some countries started the interest rate hike cycle before the Federal Reserve, and then started cutting interest rates after the Federal Reserve pressed the "pause button" on interest rate hikes. Analysts believe that the prospect of the Federal Reserve maintaining high interest rates in the coming months will prompt Latin American policymakers to use monetary leverage more prudently.

In Africa, continued currency depreciation could push many middle-class families back into poverty. Taking Nigeria as an example, families who saved money to send their children to college two years ago may now have trouble putting food on the table. African countries are responding by de-dollarization and strengthening gold reserves.

There are also public opinions expressing concerns about whether the "devaluation wave" will trigger a crisis.

Two years ago, Sri Lanka declared "national bankruptcy" due to the depreciation of its currency and its inability to repay debts; not long ago, Egypt opened exchange rate controls to ease its foreign exchange difficulties, resulting in the fourth "avalanche" of the Egyptian pound in two years... More "Gray Rhino" Incidents Will this happen?

Tan Yaling believes that the "devaluation wave" will bring shocks, but the possibility of a crisis is decreasing. After experiencing the Asian financial crisis in 1997 and the US financial crisis in 2008, various countries have become increasingly aware of crisis prevention and have established defensive measures and early warning systems.

"If foreign exchange reserves are relatively sufficient, then such risks can be completely resisted." Tan Yaling said, but for countries like Vietnam that are rapidly consuming foreign exchange, foreign capital has begun to withdraw, and their economic strength is limited, they need to guard against risks.

In this round of currency "depreciation", the United States has once again been criticized by public opinion for maintaining the hegemony of the US dollar and cutting off "leeks" from the world.

Tan Yaling believes that the United States plans to harvest U.S. dollar assets from the perspective of global interests. It is worth noting that the United States is also conducting "test fields" in Asian and Latin American countries to reconstruct its regional strategy.

"The United States has a set of hegemonic logic that strives to maintain the currency status of the US dollar." Tan Yaling said.

The United States’ “combination punch” is: aggressive interest rate hikes lead to a rapid tightening of global liquidity, a sharp depreciation of multiple currencies, and a sudden increase in debt repayment pressure for countries that borrow in U.S. dollars. In the future, interest rate cuts and the depreciation of the U.S. dollar will not only drive inflation to soar, but will also export capital and harvest global wealth by over-issuing U.S. dollar imports and investing in other countries.

Desmond Lachman, an economist at the American Enterprise Institute, previously said that the Federal Reserve's policies have exacerbated debt risks in emerging economies and made the world economy worse.