Surging Dollar Pushes "Pseudo-Tightening" In Southeast Asia

The surging dollar is prompting Southeast Asian central banks to employ alternative measures, aside from interest rate hikes, in their efforts to protect their currencies.

Southeast Asian central banks are increasingly accepting the concept of "pseudo-tightening."

This strategy is being implemented in response to increasing expectations of sustained higher interest rates from the Federal Reserve, as reported by Marcus Wong for Bloomberg News.

Indonesia is maintaining strict control over liquidity by selling bills, while Malaysia has seen its interbank rate rise to its highest level since July.

This shift in approach is occurring despite earlier predictions of interest rate peaks in Southeast Asia. These predictions were based on concerns about inflation pressures stemming from food and energy prices, along with the elevated interest rates set by the Federal Reserve.

Abhay Gupta, a strategist at Bank of America in Singapore, commented, "We expect central banks across the region to continue using a combination of liquidity tightening and intervention to counter further depreciation of their currencies against the dollar."

He also noted that Southeast Asian central banks are increasingly accepting the concept of "pseudo-tightening."

The interest rate differential between benchmark rates in Southeast Asia and the United States has continued to widen, as central banks in Indonesia, the Philippines, and Malaysia paused their rate hikes during the first half of the year.

Malaysia's benchmark rate now stands at a 250-basis point discount compared to the upper limit of the Fed fund rate, marking a record gap.

Additionally, it is 2.3 standard deviations below the five-year rate differential. For Indonesia, the Philippines, and Thailand, the same gauge indicates -2.2, -1.8, and -1.7, respectively.

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