The People’s Bank of China has set the yuan trading mid-point at its weakest level in eight months. Currency officials in Asia are pushing back against bets that have sent their currencies to their lowest level in seven months, exacerbating their underperformance for the year. Japanese officials have been warning against the excessive depreciation of the yen, while Malaysian officials have expressed concerns about the ringgit. In an effort to prop up the currency, China has fixed the yuan at a stronger-than-expected rate three times this week. The differences in domestic interest rates and monetary policy cycles among major currencies like the yen, yuan, and dollar highlight the contrasting moves. Central banks around the world are grappling with sticky inflation, sluggish growth, the Russian-Ukrainian conflict, and an energy crisis. Year-to-date, the yen has fallen over 9% against the dollar, the ringgit has dropped about 6%, and the yuan has slid nearly 5%. These currencies have reached seven-month lows against the dollar, making them some of the worst-performing currencies in Asia this year. There is an increasing risk of Japan’s finance ministry intervening in the forex market, with authorities potentially buying the yen to counter the rise in USD/JPY. The Bank of Japan’s easy monetary policy and the US Federal Reserve’s tightening stance on inflation are driving the strength of the dollar. Malaysia’s central bank has stated that the recent depreciation of the ringgit does not reflect the country’s economic fundamentals and it will intervene in the foreign exchange market to control excessive currency movements. The Bank Negara Malaysia expects measures by the government to strengthen the economy and improve the ringgit’s value. Goldman Sachs economists attribute the ringgit’s weakness to the deteriorating balance of payments, driven by increases in outward foreign direct investment and bond outflows. The People’s Bank of China has set stronger-than-expected daily reference rates for the yuan in an effort to control its depreciation. However, economists note that central bank resistance may only slow down currency moves without altering the overall trend. They believe that a return of yuan strength requires a reduction in growth pessimism and yield differentials.
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