A clerk handles bundles of Indonesian 100,000 rupiah banknotes at a currency exchange office in Jakarta, Indonesia. (Photographer: Dimas Ardian/Bloomberg)

Heat Is on Emerging-Market Currencies With Indonesia Stepping In

(Bloomberg) -- From Indonesia to India, central banks in emerging markets face rising pressure to prop up currencies battling a surging U.S. dollar.

Indonesia’s central bank has intervened in the currency and bond markets by a "sizable" amount, Governor Agus Martowardojo said in a statement overnight. He pledged to take more action to support the rupiah after it slid to a two-year low on Monday.

Heat Is on Emerging-Market Currencies With Indonesia Stepping In

"To maintain the stability of the rupiah exchange rate according to its fundamentals, Bank Indonesia has intervened in both the foreign exchange market” and the domestic bond market in “sizable quantities,” Martowardojo said from Washington, where he had attended an International Monetary Fund meeting.

The latest action from Indonesia may be a harbinger for the rest of emerging markets in Asia, especially those running current-account deficits that get undermined with a rise in U.S. yield. The Philippine peso, Indian rupee and the rupiah are among the underperformers among developing economies globally this year.

Heat Is on Emerging-Market Currencies With Indonesia Stepping In

“There could be some smoothing operations by other central banks,” said Sim Moh Siong, a currency strategist at Bank of Singapore Ltd. “So for markets, which are driven by flows like Indonesia, India, Malaysia, I imagine there would be some smoothing operations to prevent excessive volatility.”

U.S. 10-year yields approaching 3 percent is giving the dollar added impetus. The South Korean won led declines in emerging Asian currencies on Tuesday, heading for a third daily drop. The rupiah, which was little changed on Tuesday, has lost 2.4 percent against the U.S. currency this year.

Who’s Next?

The Indian central bank would probably want to do the same thing, according to Charu Chanana, an economist at Continuum Economics in Singapore. “All central banks are ready to step in, in this adverse scenario. They all have enough reserves to tackle this kind of problem,” she said.

The Reserve Bank of India’s policy is to step in to curb excess volatility but not to manage the exchange rate.

“Currencies with more vulnerable external financing issues such as in India, Indonesia and the Philippines -- the current-account deficit countries -- are the ones that are most vulnerable to this widening in the yield gap as well as slowing in portfolio flows,” said Mitul Kotecha, senior strategist at TD Securities in Singapore.

Indonesia’s central bank has been stepping up efforts to boost the rupiah in recent weeks, publicly saying it intervenes in the market. The central bank has already tapped its foreign reserves to the tune of about $6 billion in the past two months to defend the currency.

Bank Indonesia has “upped the ante in its currency jawboning more recently,” said Andy Ji, Asian currency strategist at Commonwealth Bank of Australia in Singapore. “However, market participants are simply questioning its credibility.”

Martowardojo said policy makers would continue to monitor and remain vigilant against risks including the impact of U.S. interest-rate hikes, a potential trade war between the U.S. and China, rising oil prices and escalation of geopolitical tensions.

Bank Indonesia Deputy Governor Dody Budi Waluyo called for calm and said there was no need for "panic". The central bank and government would "synergize" their efforts to protect the rupiah from deep deterioration, he said on Tuesday.

©2018 Bloomberg L.P.