Since the economy is reopening last year, the prospects of Asian currencies are declining against greenback.
Somehow, a cheaper currency can be beneficial for the economy, as it has a multiplier effect on encouraging exports and narrowing existing trade deficits. A trade deficit occurs when a country buys
more goods and services from abroad than it receives, that is, it imports more than it exports. Therefore, when demand for exports rises, the current deficit will shrink.
In practice, surprisingly, the currency depreciation does not appear to be generating strong demand for the region’s exports amid strong demand for durable goods and services in the US and EU. Since the end of last year, the trade balances of Malaysia, Indonesia, the Philippines and Singapore have declined or even turned negative (Figures 1, 2, 3 and 4).
The decline in the year-on-year export rate was also surprisingly greater than the import rate, especially in the past three months. This analysis raises a question why currency depreciation leads to a larger trade deficit in the first half of this year, which is the opposite of the expectations of economic theory. One possible explanation may be that, in view of the large-scale trade between Asia and China, the uncertainty of China’s economic prospects reduces the import demand for Asian goods and services, so it has expanded the trade deficit.
In the second half of the year, due to the continued rate hikes in the Federal Reserve, some Asian currencies may continue to depreciate, and the trade deficit may be even larger at least in the third quarter.
Compared to other countries in the region, Singapore appears to be the only country whose currency has been fairly stable over the past few months. A key reason why the Singapore dollar has been
more resilient than the Malaysian ringgit amid a stronger U.S. dollar is that the former’s yield differential widening is lesser, given that Singapore does not follow explicit interest rate policy. This makes no sense to forgo Singapore dollars for U.S. dollars, so it does not really affect Singapore’s exchange rate. On the other hand, while Asian central banks have raised interest rates a few times since last year, the relentless rate hikes in the US have indeed attracted people to prefer to hold the U.S. Dollar. Increased demand for the U.S. dollar makes it more valuable, while Asian currencies (exclude Singapore) continue to lose value as selloffs increase.
