Emerging Market Currencies Struggle... Emergency Measures for Korean Won Defense

Powell Shock Leads to Strong Dollar

Indian Rupee Hits Record Low

Brazilian Real Plummets 27% This Year

Korea Implements Emergency Measures as Exchange Rate Exceeds 1450 Won

Banks' Forward Position Limits Raised

The U.S. Federal Reserve's decision to reduce the rate and pace of interest rate cuts from next year has caused emerging market currencies to plummet. The strong dollar is due to expectations that the U.S.'s high interest rate policy will continue for an extended period. The Brazilian Real and Indian Rupee have fallen to record lows, and the MSCI Emerging Markets Currency Index has hit its lowest level in four months.

On the 19th (local time), the Brazilian Real exchange rate surpassed 6.3 Reals per dollar (Real depreciation) during the day, reaching an all-time high. It was only after the Brazilian Central Bank injected $8 billion (about 11.6 trillion won) to defend the currency value that it stabilized to around 6.1 Reals per dollar. Ioana Zamfir, an analyst at Morgan Stanley, predicted, "The Real-Dollar exchange rate could rise up to 11% from the current level, reaching 7 Reals per dollar." The Real-Dollar exchange rate has surged about 27% this year due to the strong dollar.

The Indian Rupee exchange rate broke through the psychological resistance level of 85 Rupees per dollar for the first time that day. It continued to rise on the 20th, setting a new record high for two consecutive days. The MSCI Emerging Markets Currency Index, which calculates the value of 25 emerging market currencies including Indonesia, Taiwan, and Mexico, also hit its lowest level in four months.

The previous day, the Fed significantly raised its forecast for next year's benchmark interest rate (median value) from 3.4% to 3.9%, causing the dollar index, which shows the value of the dollar against six major currencies including the Euro and Yen, to soar to 108.54 during the day, the highest level in two years.

In the Seoul foreign exchange market on the 20th, the Won-Dollar exchange rate closed at 1451.40 Won. The government announced emergency measures to improve the foreign exchange supply and demand situation as the Won-Dollar exchange rate exceeded 1450 Won. The forward position limit for domestic banks will be raised from 50% to 75%, and for foreign bank branches from 250% to 375%. By increasing the limit on forward transactions that banks can engage in, it is expected that banks' capacity to supply foreign currency funds will increase, leading to an increase in dollar supply.

Brazil Injects $15 Billion Over Two Days to Defend Exchange Rate

Emerging Market Currencies Plunge... Insufficient to Boost Real Value

Central banks in emerging markets, including Brazil and India, are intervening in the market in response to the sharp decline in their currencies. The U.S. Federal Reserve's hawkish stance is dominating emerging market monetary policies.

On the 19th (local time), the Brazilian Central Bank injected $3 billion (about 4 trillion won) into the market as the Real exchange rate surpassed the all-time high of 6.3 Reals per dollar (Real depreciation) but failed to defend the Real value. An additional $5 billion (about 7 trillion won) was injected, reducing the Real exchange rate by 2.4%. The Brazilian Central Bank announced it would supply up to $7 billion (about 10 trillion won) the next day. As the Real exchange rate fluctuates, the stock market is also experiencing a cold wave. According to Bloomberg, the short interest in the 'iShares MSCI Brazil ETF' reached its highest level in over a year. Credit Agricole (CACIB) diagnosed, "Investors have given up on Brazil."

Emerging market currencies struggle... Emergency measures for Korean Won defense The Indian Central Bank also intervened verbally and in the foreign exchange market as the Rupee exchange rate surpassed the all-time high and psychological resistance level of 85 Rupees per dollar. Despite selling dollars through state-owned banks, the exchange rate did not fall below 85 Rupees per dollar and continued to rise, setting a new record high for two consecutive days. Kunal Sodhani, Deputy General Manager at Shinhan Bank's India branch, said, "There is also the possibility of rising to the level of 85.5 Rupees per dollar." The Indonesian Central Bank also announced it intervened in the market as the Rupiah fell to its lowest level in four months. Fred Neumann, Chief Economist for Asia at HSBC, evaluated, "The Fed's hawkish stance has tied the hands of emerging market central banks."

Experts point out that the strong U.S. dollar is behind the weakness of emerging market currencies, and there are limits to central bank intervention alone. Bloomberg stated, "Emerging market central banks face a difficult decision," and "They must choose whether to respond at great cost against the strong dollar or accept the weakening of their own currencies."

The chronic fiscal deficit issue of emerging markets has also come under scrutiny. Brazil's fiscal deficit, which was at the level of 5% of last year's annual GDP, has soared to about 10% this year due to the expansionary fiscal policy of leftist President Luis Inacio Lula da Silva. JP Morgan predicted, "The Brazilian Central Bank's intervention in the foreign exchange market will not be effective as the fundamental issue of fiscal concerns remains unresolved."

Lim Dayeon/Kang Kyungmin reporters allopen@hankyung.com