Asian central banks build dollar war chests

17 June, 2021 12:00 AM printer

NEW YORK: Asia’s emerging economies have accumulated their highest level of foreign-exchange reserves since 2014, offering a powerful buffer against market volatility if the US Federal Reserve changes course.

Central bank holdings of foreign currencies in the region’s fast-growing emerging economies hit $5.82 trillion as of May, their highest since August 2014. When China’s cash pile is stripped out, emerging Asian central banks’ reserves stood at an all-time high of $2.6 trillion, report agencies.

While some of the gains reflect dollar weakness and bumper exports, policy makers are deliberately preparing their defenses, said Nicholas Mapa, an economist with ING Groep NV in Manila.

“Emerging economies are definitely learning from the past by war-chesting,” Mapa said. “They’re all the more aware of the eventual reversal in monetary policy stance of developed market central banks and the potential repercussions that may arise from a Fed taper or eventual rate hike.”

While the Fed is expected to maintain a dovish outlook when it meets this week, economists say the accelerating U.S. recovery means the bank will need to signal a policy turn sooner than anticipated. Central banks in South Korea and New Zealand already have said their improving economies may eventually justify higher interest rates.

A signal from then-Chairman Ben Bernanke in 2013 that the Fed would begin winding down asset purchases sent shockwaves through Asia, an episode that came to be known as the “Taper Tantrum.” Foreign investors fled and bond yields shot up, forcing central banks to burn through their defenses to protect their currencies. Rising yields have historically triggered currency volatility and driven up borrowing costs in the region.

Any hint of a Fed shift on tapering will quickly test defenses including current-account surpluses and foreign-exchange holdings, said Tuuli McCully, head of Asia-Pacific economics at Scotiabank.

“There are significant differences between regional countries, and some will be more vulnerable than others to any financial market volatility and capital outflows,” she said, citing Malaysia and Indonesia as countries with lower reserve coverage ratios than their peers.


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