Currency Concerns After Ukraine War, Pushed Yields Higher

Following a hawkish speech by US Federal Reserve Chair Jerome Powell and the worsening crisis in Ukraine, most Asian currencies continued to weaken on Tuesday; the South Korean won, and Thai baht led the declines. In a speech on Monday, Powell said that taming inflation requires acting “quickly” and maybe “aggressively”; this boosted the currency and Treasury rates. The dollar index (DXY) measures the greenback against a basket of other currencies; it rose to 98.629, while Treasury yields increased.

This, along with rising oil costs as a result of the European Union’s threat of imposing a Russian oil embargo, put downward pressure on Asian currencies. The South Korean won (KRW=KFTC) fell 0.6 percent; the Thai baht (THB=TH) fell 0.5 percent to its lowest level since January 10.

The baht was the region’s worst-performing currency last year and is down around 1% so far in 2022; it is facing headwinds due to the country’s susceptibility to rising oil costs. Thailand, the second-largest economy in Southeast Asia, is the region’s largest net oil importer. “Any visible rebound in the baht might be conditional on oil prices reverting to a lower trend,” Maybank analysts said.

Fluctuations in Currency Market

The Malaysian ringgit (USDMYR) fell 0.2 percent to its lowest level since early January; the Indonesian rupiah (USDIDR); Singapore dollar (USDSGD) both fell a smidgeon. Most regional bond rates increased somewhat; India’s (IN10YT=RR) and Indonesia’s (ID10YT=RR) 10-year benchmark yields traded at 6.781 percent and 6.755 percent, respectively. While the direct impact of the Russia-Ukraine war on Southeast Asian trade and investment is “limited,” analysts at Singapore bank DBS believe that the indirect impact of rising oil and commodity prices and resultant inflation would impact economic growth.

The Chinese yuan (CNY=CFXS) fell to 6.3640 per dollar. China has not condemned Russia’s invasion of Ukraine, and Washington worries Beijing is considering providing Moscow with financial and military assistance, something both Russia and China deny. “China appears to be determined to keep a diplomatically neutral posture when it comes to the conflict in Ukraine,” Maybank analysts said.

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