HONG KONG: Central banks across Asia face a difficult decision after the US Federal Reserve’s (Fed) hawkish cut – stage a costly fight back against dollar strength, or stand by and watch their currencies falter.

The Fed’s signal that inflation concerns are back on the agenda led to a sharp sell-off in Asian currencies yesterday.

The Indian rupee hit a fresh record low against the greenback, while the South Korean won fell to its weakest level since the financial crisis.

The Bloomberg Asia Dollar Index was around 0.4% lower.

China’s central bank sought to support the yuan yesterday through its reference rate.

The moves will reignite questions about how far central banks across Asia are willing to go to defend their currencies – and how much impact their moves will have.

An index shows currencies in the region have lost almost 4% against the dollar this year even as the Fed cut rates.

“It is hard to fight the higher dollar move against Asian currencies when it is primarily dollar driven, which means regional central banks would have to play defence and try to smooth out depreciation pressure to try to keep an orderly foreign exchange market,” said Hong Kong BNY Mellon strategist Wee Khoon Chong.

Asia’s central banks are taking different approaches to the dollar strength.

Bank Indonesia has been been vocal about its recent interventions in the domestic market, sending a clear signal to traders.

The Reserve Bank of India has used a mix of offshore and onshore contracts to bolster the rupee.

However, it hasn’t made public statements about its recent moves.

Other central banks have said they are closely watching the market.

The People’s Bank of China (PBoC) ramped up its support for the yuan yesterday by setting a daily reference rate that was significantly stronger than the average in a Bloomberg survey.

The so-called fixing, which limits moves in the onshore yuan by 2% on either side, is at its strongest level relative to the forecast since July.

“The PBoC will continue to restrain the upside pressures on dollar-yuan for now, but I think the exchange rate will break to new highs in 2025 on the outbreak of a second US-China trade war,” said RBC Capital Markets Asia foreign exchange strategy head Alvin T Tan.

Chinese state banks sold the dollar in the onshore market at the open and hardly offered to buy the greenback, according to traders.

The traders asked not to be identified as they are not allowed to comment on the foreign-exchange market.

Currency traders in Asia were reacting to the Fed’s so-called hawkish cut, when a reduction in interest rates was followed by remarks that made clear the central bank is still worried about inflation.

The median Fed policymaker forecasts now see just a half-percentage point of reductions next year, half of what was expected in September.

The Fed’s focus on inflation marks a key shift from its September meeting, when officials were more concerned about the labour market.

Powell said on Wednesday that the central bank’s year-inflation projection has “kind of fallen apart”. — Bloomberg