Central banks in the region have over $5.5 trillion in foreign exchange reserves that they can deploy to support their currencies, according to TD Securities’ calculations.

Attention is now focused on the measures authorities might take after verbal warnings and more robust price fixings have failed to halt the depreciation of their currencies. While exporters may benefit from a weaker currency, an extended depreciation period could trigger capital outflows.
The Reserve Bank of India has gone further by selling dollars to prevent the rupee from reaching a record low.

Top financial officials in Japan have refused to confirm whether Tokyo intervened in the markets to support the yen. Finance Minister Shunichi Suzuki stated last month that he had a strong sense of urgency regarding the yen, and authorities would not rule out any options against excessive currency movements.

Asia continues to adopt an eclectic approach to managing exchange rate pressures, including using foreign exchange reserves as the first line of defence in case of ongoing fund outflows.

India, Thailand, and the Philippines are likely to continue using their reserves to curb excessive currency fluctuations and limit imported inflationary pressures as food and oil prices rise.
Last month, the ringgit fell to its lowest level since 2007, while the Malaysian ringgit is approaching its lowest since 1998.

The good news is that most Asian central banks have a coverage ratio of imports, the number of months of imports that reserves can cover, well above the traditional empirical rule of three months. After drawing from them to defend their currencies in 2022, they have also replenished their reserves.

Asian central banks are not inclined to raise interest rates in response to the dollar’s strength. They prefer intervention through reserves for the time being. This short-term solution could prove costly if the dollar continues to appreciate while commodity prices also rise.