How will central banks respond to the latest currency falls?

Asian currencies have dropped back over the past few weeks against the US dollar, with the two worst hit currencies (the Thai baht and the Korean won) down around 6% against the greenback since the start of the month. Renewed concern about inflation in the US, which has led to a shift in investor expectations over when the US Fed will bring its tightening cycle to an end, has been the main factor behind the drops. Weaker currencies will be welcomed by the region’s struggling exporters, but not by policymakers, who remain concerned by above-target inflation. If the recent currency falls continue, policymakers are likely to react by intervening directly in foreign exchange markets. Central banks could also respond by resuming their own tightening cycles, but with Asian economies suffering from a collapse in exports and higher interest rates, this is likely to be a last resort. Around half of the region’s economies contracted in the final quarter of last year.