Review and Outlook of the Asian Foreign Exchange Market from 2023 to Mid-2024
In 2023, the Intercontinental Exchange (ICE) US Dollar Index® (DXY) mostly fluctuated in the 100-107 range, from the Fed’s rate hike move to the hike cessation, and then to a rising of the market expectation on rate cut. The DXY fell by 2.0% throughout the year. In 1H2024, US economic data showed uncertainty, and expectations on rate cuts saw twists and turns. Driven by the expectation on the Fed’s delayed and less frequent rate cuts, the DXY moved higher with fluctuations, closing at 105.85 at the end of June, up 4.4% from the end of 2023 and up 2.3% from the end of 2022. Since early 2023, the exchange rates of most Asian currencies (in this article, unless otherwise specified, all refer to currencies under bilateral exchange rate against USD) have remained weak. From early 2023 to the end of June 2024, the exchange rates of a few minor Asian currencies such as AFN and LKR appreciated; most Asian currencies such as CNY, SGD, KRW, and THB witnessed mild or moderate depreciation; while currencies such JPY, PKR and LAK have depreciated by nearly 20%, with several hitting recent or record lows.
I. Current situation
Table 1 Overview of variations in exchange rates of Asian currencies from early 2023 to the end of June 2024
Note: 1. There is no available exchange rate data for AMD in relevant data sources; 2. The fluctuation range of the exchange rate is the fluctuation rate of the currency against USD from the end of 2022 to the end of June 2024, where a positive value represents appreciation and a negative one represents depreciation; 3. Exchange rate arrangements are derived from the 2023 IMF Annual Report on Exchange Arrangements and Exchange Restrictions.
Data source: Wind.
Data shows that since 2023, 12 Asian currencies including AFN and LKR have appreciated against USD. After the plunge over recent years, AFN and LKR, the two currencies under the crawling peg system, ushered in a trend rebound. Boosted by economic bottoming out, U.N. aid and support, and the government’s crackdown on capital flights, AFN sustained its appreciation trend since 2022. In particular, fueled by Da Afghanistan Bank’s move in August 2023 to sell off USD13mn, the price of AFN soared up, with the overall momentum maintained till the year end. Since the beginning of 2023, it has appreciated by 25.6% against USD, becoming one of the best performers in the world. Thanks to economic stabilization and improved market sentiment, LKR reversed its depreciation in 2022 and has appreciated 18.7% against USD since the beginning of 2023. In addition, currencies such as SAR, KHR and MOP, which are pegged to USD or under stabilized arrangements or linked exchange rate systems, also appreciated slightly against USD.
23 currencies, including CNY, depreciated by less than 10%, showing mild depreciation. In 2023, under the resonance of internal and external factors, CNY exchange rate sustained a downward trend, depreciating by 2.0% against USD in the whole year. From early 2023 to mid-February, CNY/USD spot exchange rate (i.e. the trading price at 4:30 p.m. in the domestic inter-bank foreign exchange market, the same below) ramped up from 6.9 to around 6.7, boosted by the optimization of the epidemic policy and the market’s confidence in China’s economic recovery; after mid-February, the Fed initiated its first rate hike in the year, pushing up the DXY. As a result, CNY/USD exchange rate dropped to around 7.34 at one point; coming to October, the market expectation on the Fed’s monetary policy started to veer following the Fed’s discontinuation of rate hikes. The DXY fell, while CNY exchange rate stabilized and recovered, back into the below 7.1 range at the end of the year. Entering 2024, as the expected time point of the Fed’s rate cut was set back time and again, CNY exchange rate fluctuated with depreciation. By the end of June 2024, the spot exchange rate closed at 7.2672, a cumulative depreciation of 5.1% against that in early 2023. KRW showed strong volatility in 2023. From February to April 2023, KRW fell sharply by more than 8% due to South Korea’s record trade deficit. Coming to May, KRW rebounded as the country’s trade returned to surplus; since 2024, fluctuations with depreciation had dominated the KRW/USD exchange rate, approaching the threshold of 1400 at one point. From early 2023 to 1H2024, KRW has cumulatively depreciated by 8.7%. While India was also faced with a persistent current account deficit, INR has only depreciated slightly by 0.8% since early 2023, supported by remittances and net international capital inflows. The State Bank of Vietnam cumulatively cut interest rates by a total of 150 bps throughout 2023. Compounded by the slowdown in national economic development, VND has been dragged onto a depreciation track since early 2023, with a cumulative depreciation of 7.2% by the end of June 2024. In addition, the currencies of ASEAN countries, such as IDR, THB, PHP and MYR, have also experienced mild depreciation under the double pressure of balance of payments and spreads. The cumulative depreciation since early 2023 has fallen into 4.8% - 6.7%. In contrast, bolstered by the country’s stable economic fundamentals and effective exchange rate management policies, SGD appreciated slightly by 1.6% in 2023 and depreciated slightly by 1.2% from early 2023 to the end of June 2024.
4 currencies, including JPY and PKR, depreciated between 10% and 20%, showing moderate depreciation. Since 2023, JPY has depreciated further against the backdrop of sustained large US-Japan policy spread and widening US-Japan 10-year bond yield spreads. During this period, although there have been several brief upward movements under the intervention of the Bank of Japan, JPY has generally remained on a depreciation track. Since the beginning of 2023, JPY/USD exchange rate has dropped by 18.5% to 160.88, a new exchange rate low in nearly 40 years, the largest depreciation magnitude among developed Asian economies. PKR and BDT have also continued to depreciate sharply since 2023, mainly dragged by the widening current account deficit and the rapid depletion of foreign exchange reserves, an accumulative depreciation of 18.6% and 12.4% respectively by the end of June 2024. Due to the unprecedented depletion of foreign reserves in the process of stabilizing the foreign exchange market, the Bangladesh Bank introduced a new crawling peg system in May 2024 and reduced the BDT exchange rate against USD from 110:1 to 117:1, a one-time devaluation of 6.4%.
3 currencies, including LAK and SYP, depreciated significantly, reaching more than 20%. Affected by the economic crisis, LAK, SYP and LBP have depreciated notably. On January 2, 2023, the Central Bank of Syria adjusted the official exchange rate of SYP against USD from 3,015:1 to 4,522:1, a one-time devaluation of 33.3%. On January 31, 2023, the Banque du Liban announced that it would adjust the official fixed exchange rate of LBP against USD from 1,507.5:1 to 15,000:1 starting from February 1, a drastic depreciation of 90%, making LBP the most depreciated currency in Asia.
II. Factors affecting changes in exchange rate of major Asian currencies
1. The current wave of Asian currency depreciation is mainly driven by the spread where USD is valued far higher than Asian currencies
Policy rates in Asia are significantly lower compared to the US due to milder inflation and slower potential economic growth. Since 2023, the Fed has kept its policy rate higher for prolonged period, pushing up the USD exchange rate and US bond yields. Driven by interest rate spread factors, major Asian currencies have depreciated to varying degrees against USD. Despite the efforts that various countries have made to stabilize the exchange rate, the effect of stabilization is rather limited due to the lack of support from the fundamentals and the market.
The economic recovery and the resilience of the economic system are the leading factors affecting the degree of currency depreciation in various countries. Over the past few years, prolonged depression has been haunting the global economy amid factors including the COVID-19 epidemic and the conflict between Russia and Ukraine. Many Asian developing countries have been entrapped in economic difficulties and even economic crises. Compounded by the pressure of repayment of foreign debt and capital outflow caused by the high exchange rate and interest rate of USD, the currency of these countries has also depreciated sharply against USD. Some countries have even experienced serious currency crises. Since 2023, as some countries have gradually tided themselves over difficulties, their economies have demonstrated signs of recovery, and their currencies have rebounded and gradually recovered their lost ground. Taking Afghanistan as an example, since 2022, the country has steadily stabilized its economy with positive signs such as export growth, domestic fiscal revenue growth and lower inflation, following an economic collapse that saw GDP growth fall by 20.3% YoY in 2021. AFN has also rebounded sharply against USD. Similarly, after suffering from severe inflation and deteriorating international balance of payments in 2021, the decline in Sri Lanka’s GDP growth rate has been narrowed from 7.3% YoY in 2022 to 2.3% YoY in 2023. According to the Asian Development Bank’s Asian Development Outlook released in April 2024, the Sri Lankan economy is expected to register moderate growth of 1.9% and 2.5% in 2024 and 2025, respectively, after two consecutive years of recession, laying down a foundation for the rebound of its currency exchange rate. In contrast, other Asian developing countries, such as Pakistan and Bangladesh, are still plagued by serious disequilibrium. Amid soaring global commodity prices, these countries are facing high import costs, accompanied by depressed exports and inbound tourism, which exacerbate their current account deficits. Moreover, these countries are often under pressure to repay their dollar-denominated foreign debt. Currency depreciation aggravates the disequilibrium of these countries and the pressure to stabilize the foreign exchange market, which is likely to lead to an accelerated depletion of their foreign exchange reserves, further weakening market confidence in their currencies, and speeding up the pace of depreciation. In contrast, leading Asian economies such as China, South Korea and India, as well as many ASEAN countries, have maintained mild depreciation against USD thanks to their economic resilience and relatively abundant foreign exchange reserves.
Due to the high consolidation of the DXY since 2023, carry trade has remained a favored trading strategy due to the combination of high spreads and low exchange rate fluctuations. It has also acted as a dominant driver for the sustained depreciation of JPY as a financing currency. Though the Bank of Japan withdrew from the negative interest rate policy in March 2024 and intervened in the JPY exchange rate by selling foreign exchange reserves, it did not save the day. JPY continued its decline and hit a new record low in 1H2024, becoming a relatively weak performer since 2023.
2. The sustained pressure on CNY mainly stems from the divergence of economic cycles and monetary policies between China and the US
After two consecutive rises in 2020 and 2021, CNY exchange rate has entered an adjustment since 2022 and has been under pressure since 2023, the divergence of economic cycles and monetary policies between China and the US being the underlying reasons. Since 2021, the US has experienced overheated employment and high inflation, with actual economic growth exceeding potential growth, resulting in a positive output gap; while in China, with underemployment and low inflation growth, it real economic growth is lower than potential growth, resulting in a negative output gap. As a result, China and the US went against each other in their monetary policies. The Fed implemented aggressive tightening to fight inflation. Since March 2022, it has made 11 rate hikes in 17 months, totaling 525 bps, raising the policy rate to 5.25-5.5%. Since then, it kept the interest rate unchanged for seven consecutive Federal Open Market Committee (FOMC) as of the end of June 2024. On the other hand, the People’s Bank of China (PBoC) continued to cut interest rates to stabilize growth. China’s interest rates have gradually been surpassed by the US and the spread has widened. The China-US 10-year Treasury yield gap widened from 100 bps at the beginning of 2023 to around 220 bps at the end of June 2024, driving CNY depreciation. From early 2023 to the end of June 2024, the DXY rose by 2.3% cumulatively, while the CNY middle and closing prices fell by 2.3% and 5.1%, respectively.
However, rather than saying that the inverted interest rates between China and the US are the reason for the decline of the CNY, it is more accurate to say that they are two sides of the same coin, reflecting the divergence of economic cycles and monetary policies between China and the US Prior to 2007, US treasury bond yields were often higher than that of China. However, after China’s “July 21” exchange rate reform in 2005, CNY rallied as China’s real GDP grew at an average annual rate of 12.8% during 2005-2007, much higher than 2.8% of the US A strong economy means a strong currency. Negative spreads did not prevent CNY from strong appreciation. Since 2023, the Fed’s faster-than-expected tightening and the strong USD trend have masked the support for the CNY exchange rate from a good start in China’s economy and a rebound in the economic fundamentals, putting overall pressure on the CNY. This is not unique to China. Most non-dollar currencies are generally under pressure as the Fed kept interest rates higher for a prolonged period. Some Asian and emerging economies had sharp currency depreciation against USD, while the CNY has remained relatively solid against a basket of currencies. From early 2023 to the end of June 2024, the China Foreign Exchange Trading Center’s CNY exchange rate index rose by 1.4%.
III. Outlook
1. The DXY may decline in the short term in the near future, but it may remain moderately strong in the medium to long term.
Since July, the market has gradually switched from “Trump trade” (trade on the expectation of Donald Trump’s being elected as president, such as increased investment in US domestic stocks and hedging against a strong dollar) to “recession trade” (turn to safe-haven assets such as gold and reduce investment in risky assets). The Fed’s interest rate cut step and the US election are important factors affecting the DXY in H2. In the latest World Economic Outlook released in July, the IMF lowered the US 2024 GDP growth forecast by 0.1 ppt to 2.6%, believing that the US economy is showing signs of cooling. On July 31, although the FOMC meeting kept the policy rate unchanged at 5.25-5.5%, the Fed Chairman Powell released a “pigeon” signal in his speech. The market expected that the Fed might cut interest rates in September, and the obviously weak data on American manufacturing and unemployment rate released in the following days triggered the market’s expectation for an earlier cut. In addition, the Bank of Japan “unexpectedly” launched a rate hike by 15 bps on July 31 and started a tapering, i.e., reducing bond purchases, which narrowed the spread between the US and Japan interest rates, reversed the carry trade and drove a sharp appreciation of JPY. Coupled with the escalation of the Middle East geopolitical conflicts, the market showed increased risk aversion sentiment, which drove the DXY falling rapidly since August. As the conditions for a rate cut by the Fed gradually take shape in the future, the DXY may experience some decline from its current high level. However, bolstered by the following three factors, the DXY may find it difficult to step onto a depreciation track in the short term.
First, the Fed has limited room for interest rate cuts. For now, despite positive progresses in easing inflation in the US, with CPI inflation falling from 9% to around 3% and PCE inflation falling from 7% to below 3%, it is still some way off the 2% target. In addition, both core CPI and PCE inflation have consistently outpaced headline inflation since February 2023, suggesting a stubborn US inflation pressure. Moreover, the current US inflation is also a mixed inflation, reflecting both demand-side and supply-side reasons. The unexpected inflation rebound in 1Q2024 mainly reflected an increased impact from supply-side factors. In Europe, the European Central Bank (ECB) cut its interest in June 2024, and then inflation rebounded in July, reflecting the stubborn European inflation and the fact that supply-side shocks have not fully subsided. Since the improvement in inflation brought about by the fall in commodity prices has been near its end, there is upward rebound pressure on both energy and food prices. Coupled with the disruption to global supply chains caused by geopolitical shocks such as the Israeli-Hamas conflict and the Red Sea crisis, the Fed’s road to fighting inflation is not smooth. In addition, if Trump is re-elected, his policy proposals such as raising tariffs, expelling immigrants, and supporting traditional energy will further intensify the impact on the industrial chains and supply chains. Coupled with his expansionary fiscal policy, it may push up the US inflation. In this backdrop, the Fed will also find it difficult to significantly cut the rates. However, it is worth noting that the US unemployment rate has almost triggered the “Sahm Rule” of thumb that indicates a US recession, the impact of which cannot be ruled out. If the future US unemployment rate has significant changes, the Fed may cut more interest rates, and earlier.
Second, the huge US fiscal stimulus is expected to continue. From the perspective of spanning the US political and monetary policy cycles, the current dollar strength has lasted for nearly a decade, and its core drivers have been strong economic growth and asset price booms brought about by fiscal stimulus. Since Biden took office in 2021, his stimulus package, combined with Trump-era stimulus legacy, has led to a massive spending spree and strong employment in the US, supporting the DXY strength. In particular, since 2023, the US has maintained a high deficit fiscal stance despite the full employment. Successive high deficits have hedged against the effects of monetary tightening, boosting economic growth and a strong dollar. During 2021-2023 period of the Biden administration, the US government deficit averaged 7.7%, while the real GDP growth averaged about 3.4% annually, and the DXY rose by 12.7% cumulatively. The US budget deficit is expected to continue rising to $1.92tn in 2024, according to the latest forecast released by the Congressional Budget Office in June. If the Democrats stay in power in the next term, it is expected to continue the current loose fiscal stance; if Republicans take office, Trump’s tax cuts would amount to a new fiscal stimulus, which would also benefit the dollar.
Third, the euro may find it difficult to maintain strong against the dollar. The euro has a weighting of 57.6% in the DXY. It appreciated 3.1% against USD in 2023, and fluctuated in the range of 1.06 to 1.10 in 1H2024, which is an important factor restraining the USD from strengthening sharply again since 2023. At present, the ECB has cut interest rates ahead of the Fed, and the spread remains within a wide range. In the future, although the economic cycle and monetary policy divergence in Europe and the US tend to converge, the market still believes that the US economy is more resilient and that the long-term outlook remains better than that of the euro area; at the same time, if Trump takes office and sets off a new round of economic and trade frictions, the euro zone being more open to trade than the US means that the euro is more sensitive to worsening global trade tensions than the dollar, and risk aversion and other factors may drive the dollar to appreciate. For example, during Trump’s first term, even though the Fed cut interest rates three times in 2019 by a total of 75 bps, by December 2019, the monthly negative spread between German and US 10-year Treasury yields had narrowed by 44 bps from the end of the previous year. However, as the US escalated economic and trade frictions with major trading partners such as China and Europe, which raised risk aversion, the dollar appreciated instead of depreciation. For the whole of 2019, USD appreciated by 2.2% against the euro and the DXY rose by 0.4%.
2. Asian currencies will have their depreciation pressure eased, and the economic performance will be a key rates affecting factor
As the US economy cools and expectations for the Fed policy easing strengthen, the general weakness of Asian currencies against the dollar as low-interest currencies will ease. If the Fed starts a rate-cutting cycle and drives gradual improvement in global financial conditions, the cross-border capital flows in equity and bond markets may outweigh the spread factor and re-support Asian currencies. Against this backdrop, the economic performance of Asian countries may dominate their local currency movements.
Overall, Asian economic growth will slow modestly, but the economic outlooks for different countries are divided. In its latest Regional Economic Outlook: Asia and the Pacificin April, the IMF forecast that real GDP growth in Asia would slow slightly to 4.5% in 2024, down 0.5 percentage points from the previous year. The actual GDP of developed Asian economies is expected to grow by 1.6%, with South Korea and Singapore growing by 2.3% and 2.1% respectively, up 0.9 and 1.0 percentage points respectively YoY; Japan will grow by 0.9%, down 0.4 percentage YoY, mainly due to the likely weakening of a surge in exports and tourism. Emerging and developing Asian economies are expected to grow by 5.2% in 2024, down 0.4 percentage points YoY. India and the Philippines are forecast to grow by 6.8% and 6.2%, respectively, making them a source of positive growth. Growth in other Southeast Asian economies is highly heterogeneous. Affected by the divergence of economic growth prospects, Asian currencies may have mixed performance in the future.
3. The CNY exchange rate trend in 2H2024 depends on the evolution of the internal and external context
Since the end of July 2024, the DXY has weakened due to rising expectations of interest rate cuts by the Federal Reserve. The strong rise of JPY has led to a recovery in the overall sentiment of Asian currencies. Coupled with China’s further growth stabilizing policy to boost domestic market confidence, the CNY exchange rate has experienced a sharp rebound. Whether the CNY exchange rate can break the depreciation trend and evolve from a rebound to a trend reversal still depends on the evolution of the internal and external environment.
On the one hand, under the response idea of “consolidating the foundation and cultivating the vitality”, the current Chinese economy focuses on recuperating and maintaining health, and adheres to the general tenor of seeking progress while maintaining stability. Therefore, it is not appropriate to expect too much from policy stimulus and economic rebound in the short term. However, according to the IMF’s report on China’s Article IV consultations, China’s GDP deflator is expected to turn 0.1% this year from -0.6% in the previous year, indicating that the quality of China’s economic growth is improving, which will help consolidate the economic foundation for a stable CNY exchange rate. On the other hand, the US economy, the Fed monetary policy and the US dollar exchange rate also have a variety of possibilities. If “Sahm Rule” takes effect again, and the US economy has a “hard landing”, the Federal Reserve is bound to cut interest rates sharply, the dollar is likely to continuously weaken, which will mean the inflection point of the CNY is coming; If “Sahm Rule” fails and the US economy has a “soft landing,” the Fed will only cut interest rates in a preventive manner, and the dollar may still be slightly strengthening. This rebound will make the CNY return to range bound fluctuation; if the US economy has “no landing”, the Fed could pause action after preventive interest rate cuts, and USD will strengthen again, which may pressure the CNY exchange rate.
In addition, the impact
of geopolitical factors cannot be overlooked in H2. The US election is in full
swing. Whichever candidate is elected will continue to target China but may
adopt a different strategy. This will have a significant impact on the future
Sino-US relations, which in turn will affect China’s cross-border capital flows
and the CNY exchange rate. Excluding this factor, if the Fed cuts interest
rates in the second half of the year, it means that the gap between the US and
China’s economic cycle and monetary policy tends to narrow, which will help
ease the downward pressure on the CNY exchange rate.
[1] The 12 sectors include robotics, digital economy, medical centers, smart electronics, healthcare, tourism, agriculture and biotechnology, defense education, and human resource development, etc.
[2] In August 2024, the National Energy Administration of China released a white paper entitled China’s Energy Transition.
【This article is AFCA Working Paper No. 2025-02/193】
Expert Biography
Guan Tao, holding a Doctor of Economics degree, is a Fellow of Asian Financial Cooperation Association Think Tankers Committee, Global Chief Economist and Managing Director of BOC International (China) Co Ltd. He is also a doctoral supervisor and a Distinguished Professor of the Dong Fureng Economic and Social Development Research Institute at Wuhan University. Additionally, he serves as a standing director of the China Finance Society, a standing director of the China Society of World Economics, and a director of the International Finance Society. He has been dedicated to research in areas such as macroeconomics, international finance, monetary policy, exchange rate policy, etc. for a considerable period.
About AFTTC
No. 2025-01/192 Liu Xiaoshu, Review and Outlook of the Asian Currency Market from 2023 to Mid-2024
