(The opinions expressed here are those of the author, a columnist for Reuters)

ORLANDO, Florida - The Taiwan dollar's record rise in recent days has brought a regional conundrum into sharp focus: how much appreciation can Asian currencies countenance in the face of U.S. President Donald Trump's global trade war?

Currency depreciation would typically be the weapon of choice for Asian policymakers seeking to mitigate the export and growth shocks caused by a trade war. But many Asian currencies are moving in the opposite direction.

The Taiwan dollar's 6% rise against the greenback over Friday and Monday marked a record two-day spike. It's unclear what sparked the surge of capital into a market that was 'long' dollars and unhedged. Many analysts say it was speculation that Taiwan had agreed to allow its currency to strengthen as part of an upcoming trade deal with Washington, a claim Taiwan's central bank and president have strenuously denied.

But regardless, what matters is that the Taiwan dollar's jump didn't come in isolation, raising doubts over Asia's willingness or ability to use FX as a trade war shock absorber.

CONTAGION

In parallel with the Taiwan dollar's record move in recent days, the South Korean won on Monday also clocked its biggest two-day rally in 15 years, while China's offshore yuan hit a six-month high. China's markets reopened on Tuesday for the first time since Thursday, and the onshore renminbi gapped sharply higher too.

On Saturday, the Hong Kong Monetary Authority sold HK$46.54 billion ($6 billion) of local currency to prevent it from strengthening beyond its official band between 7.75 and 7.85 per U.S. dollar. That was the HKMA's first such action in four and a half years and its largest-ever intervention in the FX market.

And even though the Indian rupee, Indonesian rupiah and Vietnamese dong were all recently at record lows against the U.S. dollar, they have begun to ride the continent-wide crest of rising currencies in recent days, especially the rupee.

'RIPPED OFF'

This is exactly what Trump wants. Some of America's biggest bilateral trade deficits are with Asian countries who Trump says have "ripped off" the U.S. for years, in part, because, he argues, they have kept their exchange rates artificially weak through central bank intervention and by accumulating huge foreign currency reserves.

Indeed, six of America's top 10 bilateral trade deficits last year were with Asian countries, topped of course by China. America's combined deficit with these six countries last year was more than $650 billion.

It's also true that many Asian countries closely manage their currencies to varying degrees or regularly intervene in the market ostensibly to limit volatility but implicitly to exert some control over the exchange rate.

How much any of this is 'fair' or 'unfair' trade is highly debatable. But what is not up for debate is that the region will face immediate challenges in an environment where the question is how far Asian countries can let their exchange rates rise.

CROSSROADS

All else being equal, a strengthening currency will make these countries' exports less competitive on the international market, but appreciation could be a price worth paying if it secures less punitive trade deals with Washington. The weighted average U.S. 'reciprocal' tariff on Asia is over 40%, up from around 12% before Trump's trade war, MUFG analysts estimate.

On the other hand, intra-Asian trade is more important than ever, expanding 43% over the past four decades to more than half of all Asian trade, according to the International Monetary Fund. Consequently, ceding some competitive advantage to the U.S. via the dollar exchange rate will be less meaningful than relative regional competitiveness. This may limit Asian countries' tolerance for local currency strength.

The other issue Asian policymakers may struggle with is dollar weakness more broadly. There was a widely held belief in the months surrounding Trump's election win last November that his tariff agenda would stoke U.S. inflation, force the Federal Reserve to raise interest rates, and therefore boost the dollar.

But while price pressures and inflation expectations have indeed intensified in recent months, U.S. growth is weakening, and markets expect the Fed to cut rates this year. On top of that, a risk premium has been built into the dollar's price as Trump's erratic and controversial policies have prompted many investors to reassess their willingness to hold U.S. assets.

Considering all this, Asian policymakers face huge challenges in determining how best to respond to the U.S. trade salvos. But one thing is for sure, 'weaponizing' FX may no longer be the obvious option.

(The opinions expressed here are those of the author, a columnist for Reuters)

(By Jamie McGeever Editing by Susan Fenton)


Reuters