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Asian central banks hold nerve after China depreciation
[SINGAPORE] Some of Asia's most interventionist central banks are for now holding their nerve on currency policy after a major devaluation in the currency of one of their top trading partners, China.
China's central bank said Tuesday's surprise 1.9 per cent devaluation of the yuan was a one-off move, while it also switched to a more market-determined benchmark for the currency's daily trading band.
Even as market participants pushed the yuan down further to test a 2-per cent daily limit, policymakers from South Korea, India, Indonesia and Japan said they saw no reason for tit-for-tat trade-war policies.
"We are not overly worried about the won (currency), but we are closely watching the market to see if there's any excessive volatility happening," a South Korean foreign exchange official told Reuters.
"This came as emerging-market currencies have already been depreciating against the dollar," he said, while pointing to the yuan's relative stability in the past few months even as emerging market currencies ceded ground to a rising US dollar.
China is Korea's largest trading partner, accounting for a fifth of total trade last year. While the won has weakened relative to the yuan this year, Korean policymakers have been actively trying to encourage outflows from their country and talking down the won.
Some of the angst in Korea is over the how uncompetitive the won is against export competitor Japan, where the yen has been pushed down 50 per cent against the dollar since 2012 as part of the government's growth strategy.
Japanese policymakers shrugged off the yuan's 2 per cent devaluation. "I don't think the move would trigger a global currency war," a Japanese policymaker said.
Senior Deputy Governor Mirza Adityaswara at Indonesia's central bank pointed to how undervalued the rupiah currency already was, precluding the need for further depreciation.
Analysts estimate the yuan has risen by more than 18 per cent in trade-weighted and inflation-adjusted terms against the currencies of its trading partners since the middle of last year, suggesting there is some margin before depreciation would raise concerns over trade competitiveness in the region.
The yuan is barely down 2 per cent against the dollar this year, compared with a 13 per cent decline in Malaysia's ringgit , near 8 per cent drop in the won and a more than 4 per cent fall in the yen.
The Indian rupee is the only regional currency with smaller losses this year, thanks to big foreign investment flows attracted to India's strong economy.
"It is like jogging - everyone has to keep pace so that at the end on a relative basis you don't lose," a senior Indian policymaker told Reuters. "We have to carefully balance the rupee so that the country doesn't lose ground on the external side and neither do we import lot of inflation."
Market analysts said there was little cause for immediate concern by the Chinese move. "China is playing catch-up rather than being the leader of this currency weakness," said Mitul Kotecha, head of currency and rates strategy at Barclays in Singapore.
"There hasn't been a significant correlation or sensitivity of Asian currencies to China's currency so far. But now that will change."