Bangkok--16 Sep--Moody's Will Central Banks Try to Prop Up Depreciating Currencies? by Nikhilesh BhattacharyyaKey Points Authorities in India, Indonesia, Malaysia, the Philippines, South Korea and Thailand sold dollars in September to try to boost ailing currencies. But currency market intervention is likely to have little success, with many factors still pointing to weakening Asian currencies. With the exception of the yen, the outlook for Asian currencies remains bearish. September has seen a shift in thinking at many Asian central banks. Prior to this month, policymakers appeared content to watch their currencies slide, as they altered their focus from fighting inflation to fostering growth. But in the last few weeks, a number of central banks have taken action to prop up their currencies, raising questions about whether the unsuccessful foreign exchange policy of the Bank of Korea will be replicated in other Asian nations. The South Korean central bank has spent at least $18.5 billion in foreign reserves since the beginning of the year, in an unsuccessful attempt to prop up the ailing won, which has fallen 18.1% over the same period. A large current account deficit, negative real interest rates, slowing growth and high energy prices have weighed heavily on the won. South Korea is heavily dependent on energy imports, and even the recent sharp drop in oil prices has failed to halt the weakening of the won. With few signs of an imminent rebound in faltering domestic demand, the central bank is unlikely to have any success in stopping the expected depreciation of the won over the rest of the year. High commodity prices had been the saving grace for a number of currencies in the region. But with WTI crude oil having fallen 30.8% since June 11, commodity exporting nations have also seen their currencies slide. The ringgit and baht have depreciated 5.9% and 4.3%, respectively, since June 11, as falling commodity prices have slowed export revenues. In addition to declining capital inflows, outflows have increased due to accelerating inflation, faltering stock markets, and rising political uncertainty. With political problems likely to persist and growth expected to slow, the ringgit and baht should weaken further. The Philippines and Indonesia are both experiencing severe inflation problems, with second round effects having set in. Negative real interest rates and faltering stock markets have led to capital outflows from both nations, with the rupiah and peso having depreciated 5% and 2.4%, respectively, since July 1. India also has inflation and equity market problems, but has seen a sharper 5.9% depreciation in the rupee due to a widening current account deficit. With elections next year expected to lead to a large budget deficit, the current account deficit will widen further, and it is expected that the rupee will weaken accordingly. With most Asian currencies expected to depreciate further, the multibillion dollar question is how authorities will respond. The unsuccessful performance of the Bank of Korea in attempting to prop up the ailing won demonstrates the futility of currency market intervention. Hopefully other central banks in the region will not make the same mistake and lose billions fighting an impossible battle against markets, which hold the upper hand in these matters. This commentary is produced by Moody's Economy.com, Inc., a subsidiary of Moody's Corporation engaged in economic research and analysis. Moody's Economy.com's commentary is independent and does not reflect the opinions of Moody's Investors Service, Inc., the credit ratings agency which is also a subsidiary of Moody's Corporation. If sourcing this article please quote Moody's Economy.com. contact info: Email Nikhilesh Bhattacharyya / +612.9270.8180