Rebuilding Asian Central Bank Reserves in Response to Growing Fed Bets

Central banks of emerging markets in Asia are looking to rebuild foreign currency stocks, to help defend their currencies if the dollar rebounds.

In this context, India, South Korea, Taiwan and the countries of Southeast Asia have recovered about 132 billion dollars to their reserves since November – more than half of what they lost last year – by absorbing dollar inflows, with the weakness of the US dollar which also boosted the valuations of their portfolios, according to Bloomberg, and Agency they looked into it.

The Indian rupee has lagged its emerging market counterparts, in partly because its central bank has been more aggressive in rebuilding reserves.

These countries saw their foreign reserves fall by $243 billion in the first ten months of 2022 as they tried to defend currencies that had fallen against the dollar. And rebuilding their inventories can help emerging markets in Asia to resist any potential U.S. currency recovery as some traders start pricing in higher peak rates in the U.S., which could hurt demand for risky assets.

Nomura Holdings strategists, including Craig Chan, commented: “If reallocations of asset for EM/Asia investors, given the large outflows of foreign portfolios and a weak weighting for most of the last year, we believe Asian central banks are an exception. will build up reserves on a large scale in the coming months.”

Goldman Sachs assigned an underperforming rating to the rupee, in part due to RBI actions, while Nomura advises clients to sell the rupiah against the Indonesian rupiah.

While Deutsche Bank AG has moved tactically to recommend a hold, or weight reduction, on most Asian currencies, it remains positive on Asian currencies from a medium-term perspective.

And it has lost $100 billion since last year in largely due to the backstop in rupee, the RBI has seized every opportunity to raise dollars, increasing reserves by about $50 billion over the past three months. South Korea added $26 billion in the same period after losing in previously $49 billion, and Indonesia recovered $9 billion of the $15 billion it lost, according to Bloomberg calculations.

Most emerging Asian currencies rose over the past three months, led by the Thai baht and Philippine peso, with dollar weakness driven by bets that the Federal Reserve will focus on interest rates. Recent data have put in question these expectations. Federal Reserve officials stressed the need for more rate hikes to help tame inflation after US data again beat economists’ estimates on Tuesday.