Rupee drops to record low, other Asian currencies tank against US dollar. Here's why

The past few days have seen currencies like the rupee, yen, and yuan making big headlines. The reasons are not the best. The value of currencies of several Asian nations tanked against the United States dollar. Some have hit multi-year lows. But why?

A variety of factors are responsible. Here’s a look at the current situation regarding currency exchange rates, and causes that have led to Asian currencies weakening against the US dollar.

Asian currencies faring poorly

For five days straight, the value of the US dollar has been inching up. The Indian rupee, on Tuesday, ended at a record closing low of 83.535 against the dollar. The Japanese yen, too, felt the heat from the rising greenback. On Tuesday, it hovered around 154.28 per US dollar, the lowest in 34 years.

The Malaysian ringgit, on Monday, slipped to 4.78 per US dollar, only a breath away from its 26-year-low of 4.8053. That was still better than its peers, the Indonesian rupiah and South Korean won.

In the past couple of days, the Indonesian rupiah has dived below the 16,000 per US dollar mark, a first since 2020. Meanwhile, South Korea’s won slipped to the closely-watched psychological level of 1,400 per US dollar. That last happened during the pandemic in late 2022, Bloomberg reported.

There has been a drop in the Chinese yuan too. However, this was not as steep as other currencies in the region. On Tuesday, the yuan hovered around a five-month low at 7.24 per US dollar.

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Asian currencies like the Chinese yuan, Indonesian rupiah, and the Indian rupee have been tanking against the US dollar. Reuters

Factors affecting the value drop

Most Asian currencies have become weaker due to a stark rise in the value of the US dollar. The jump in the price of the greenback is courtesy of various reasons, ranging from the Iran-Israel tensions to inflation data. There are also country-specific factors affecting the fluctuations in currency.

1. Iran-Israel tensions: Tensions in West Asia rose after Iran mounted a retaliatory attack on Israel. Amid heightened uncertainty and volatility, investors tend to rush towards “safe haven” assets. The US dollar is considered safe due to the stability it offers. When geopolitical tensions flare up, global investors typically sell their investments denominated in their local currencies in favour of US dollars or dollar-denominated investments. A similar rise in the demand for the currency has likely pushed up its value this time as well.
2. Retail sales data: The retail sales data for March came in stronger than expected. The numbers boosted the confidence in the US economy and its growth trajectory. That could have contributed to positive investor sentiment and bolstered the expectation of a delay in the rate cut. This, in turn, would provide a boost to the US dollar.
3. Hotter-than-expected inflation in the US: Data released by the US labour department on Friday showed that inflation in the US rose more than expected in March this year. That slashed expectations of an interest rate cut by the Federal Reserve in the near future. With the interest rates staying high, bond yields tend to go up. The higher yields attract investment capital from investors abroad seeking higher returns on bonds and interest-rate products.

Some regional factors affected Asian currencies, too.

1. Chinese economic data: A flurry of China’s economic data points was released recently. While the GDP numbers painted a positive picture, other indicators like property investment, retail sales, and industrial output showed that demand remains shaky and that the nation’s economic rebound remains uneven. That would have impacted investor sentiment, which has already been subdued due to the larger economic crisis, Reuters reported.Chinese businesses are holding onto dollars because they anticipate a decline in the value of their own currency. This phenomenon is contributing to the fall of the yuan, which is already affected by unstable stock markets and sluggish economic growth in China, the world’s second-largest economy.

   

   China economy

   The economic data from China has also had an impact on Asian currencies. File image/Reuters

2. Week-long build-up released in Indonesia: Local markets in Indonesia were closed from 8 April until 15 April for Eid al-Fitr. The build-up from developments such as the Iran attack, and jolts from China and the US economic data played a role. This may be why the rupiah saw a steep decline in one session.
3. Weakening yuan and the impact on Asian currencies: China’s managed currency plays a significant role in the region, as it is considered an anchor for its neighbouring countries’ currencies, particularly those of South Korea and Thailand, where China is the top trading partner. Any weakening in China’s currency could have a considerable impact on these countries.

With inputs from agencies