Asia’s currency-defence war chest has swelled to $8 trillion

The Indian rupee and Philippine peso have both set record lows over the past two months, while the South Korean won is near the weakest level in 16 years

Asia’s foreign-exchange reserves have surged to almost $8 trillion, providing the authorities from Tokyo to Mumbai with ample ammunition if they need to step up defending their currencies.

The major central banks in the region have added more than $400 billion to their reserves this year, with 11 of the largest monetary authorities now having a stockpile of close to $8 trillion, according to data compiled by Bloomberg. The increase has been helped by this year’s decline in the dollar and rally in gold prices.

“Asia Pacific countries have ample FX reserves despite the drawdown by some nations on the back of smoothing activities,” said Wee Khoon Chong, Asia Pacific macro strategist at BNY in Hong Kong. “At present, the import cover ratio for regional countries is at more than comfortable levels.”

Central bank intervention is back on the radar in Asia as heightened volatility in global equity markets has led to a rebound in the dollar since September and broad weakness across regional exchange rates. The Indian rupee and Philippine peso have both set record lows over the past two months, while the South Korean won is near the weakest level in 16 years.

The biggest contributor to this year’s foreign-reserve buildup was China, which increased its total by $141 billion, and Japan which added $116 billion. The weaker dollar through the first nine months of the year helped bolster reserves by increasing the value of their non-dollar assets, while the rising gold prices further increased the overall value of reserves.

India’s rupee has fallen more than 3% this year, hurt by US tariffs of 50% on the nation’s exports and outflows from local stocks. The central bank has been active in both onshore and offshore markets in recent weeks as it tries to prevent the currency from breaching its record low of 88.80 per dollar set in late September.

The Korean won slumped 3.2% over the past month, spurring officials to say they will work with major market players, including the state-owned National Pension Service, to defend the currency. Japan’s Finance Minister Satsuki Katayama strengthened her warning over the yen’s slide as the currency weakened to a 10-month low versus the dollar.

While efforts to stem currency declines may be seen as necessary, they come with the possible risk of a clash with US President Donald Trump, who made FX intervention part of the reason for implementing higher tariffs. Taiwan’s central bank and the US Treasury recently agreed to avoid meddling with the exchange rates or international monetary systems to gain an unfair competitive advantage.

“There are some signs that Asia central banks are growing more concerned about forex weakness,” said Michael Wan, a senior currency strategist at MUFG Bank Ltd. in Singapore. “FX reserves should remain the first line of defense in a modest way, but Asian central banks would also be cognizant of perceptions of exchange rate manipulation by the US Treasury and how that could affect the evolution of trade deals moving forward.”

The US Treasury declined to name any country a currency manipulator in its most recent semiannual review of foreign-exchange practices published in June, but it did single out China for “its lack of transparency.” The list of trading partners whose currency actions are being closely monitored includes Asian countries such as China, Japan, Korea, Taiwan, Singapore and Vietnam.

In addition to rising foreign-exchange reserves, the authorities also have other tools at their disposal. These include making verbal warnings, as frequently issued by Japan, or encouraging repatriation of overseas earnings, as done by Malaysia.