The rising US dollar poses a significant challenge for Asia's central banks.

• Since President-elect Donald Trump won the 2024 presidential election, the U.S. dollar has appreciated sharply, causing Asian currencies to fall to multi-year lows.
• In recent weeks, the Chinese yuan, Japanese yen, Indian rupee, and Korean won have all experienced a decline in value.
• The decrease in foreign currencies has sparked concerns about imported inflation and may hinder central banks' ability to manage domestic economic policies.

Central banks in Asia face a catch-22 in 2025.

The surge in the value of the U.S. dollar has caused several Asian currencies, including the Japanese yen, South Korean won, Chinese yuan, and Indian rupee, to fall to their lowest levels in years against the greenback.

Central banks in Asia must evaluate the impact of a cheaper currency on imported inflation and prevent speculative bets on a prolonged currency weakness that could hinder policymaking, according to analysts.

Since Trump won the 2024 presidential election, the U.S. dollar has experienced a significant appreciation, increasing by approximately 5.39% as of Nov. 5.

The strength of the U.S. dollar can be attributed to the inflationary policies that Trump had promised during his campaign, such as tariffs and tax cuts.

The minutes released Wednesday revealed that federal officials at their December meeting were concerned about inflation and the potential impact of President-elect Donald Trump's policies on interest rate cuts. As a result, they decided to move slower on interest rate cuts due to the uncertainty.

The gap between U.S. and Asian bond yields has increased due to the reassessment of the Fed's monetary policy outlook.

The decline in interest rate differential has reduced the appeal of assets with lower returns, resulting in a drop in major Asian currencies and prompting central banks such as the Bank of Japan and the Reserve Bank of India to intervene.

Tiger Brokers' market strategist James Ooi stated to CNBC that a robust US dollar would pose challenges for Asian central banks in managing their economies.

According to Ooi, a stronger U.S. dollar is likely to pose challenges for Asian central banks by increasing inflationary pressures through higher import costs and straining their foreign exchange reserves if they attempt to support their currencies through interventions.

Lowering interest rates to stimulate economic growth can be counterproductive when a country is facing high inflation and a depreciating currency, according to Ooi.

On January 7th, the Chinese yuan reached a 16-month low of 7.3361 onshore, due to the influence of increasing U.S. Treasury yields and a stronger dollar.

If the yuan were weaker, Chinese exports would become more competitive, potentially boosting growth in Asia's largest economy.

The director of equity research for Asia at Morningstar, Lorraine Tan, stated that a stronger U.S. dollar would limit the People's Bank of China's ability to lower interest rates without risking increased capital outflows, while also providing the domestic economy with more monetary flexibility.

Since last September, China has been facing challenges in sustaining its economy and has implemented various stimulus measures, such as interest rate cuts and support for the stock and property markets.

The country recently introduced a consumer trade-in scheme to boost consumption by offering equipment upgrades and subsidies.

Tan added that China's growth requires an increase in fiscal spending.

Ken Peng, head of investment strategy for Asia Pacific at Citi Wealth, advised that the Chinese government should issue more long-term bonds to fund its economic stimulus, rather than cutting rates.

Peng stated that China does not require any further monetary policy, so the question should not be about the PBOC (People's Bank of China) but rather the MOF (Ministry of Finance).

A weak yuan could make it more challenging for other Asian economies to attract foreign buyers to their products and services.

Citi Wealth predicts that a significant decline in China's currency could negatively impact economies that compete with or export to China, including South Korea, Taiwan, and Southeast Asian countries.

In 2024, the Bank of Japan spent more than 15.32 trillion yen ($97.06 billion) to stabilize the currency, following a sharp decline in the yen's value to multi-decade lows in July, reaching a low of 161.96.

The currency is currently at its weakest against the greenback since July, with a value of approximately 158.

Japanese officials have frequently cautioned against "unilateral" and "erratic" actions regarding the yen, most recently on January 7th.

The BOJ's goals may be partially influenced by a strong dollar.

Despite the BOJ's efforts to combat deflation for years, Japan has experienced inflation above its 2% target for 32 consecutive months. The BOJ recognizes that a weak yen may result in an increase in imported inflation.

The BOJ aims to prevent prices and wages from increasing at a faster rate than it is comfortable with.

The BOJ may increase interest rates to strengthen the yen and reduce inflation risks, as suggested by Tan at Morningstar.

The central bank of South Korea recently intervened to support the won, causing the country's foreign reserves to fall to a five-year low, according to a Jan. 6 report by Yonhap.

Since Trump's election, the won has gradually weakened against the dollar, reaching its lowest level of 1,476 to the greenback in December 2016.

Despite a weakening won, the Bank of Korea has prioritized stimulating domestic growth by cutting interest rates by 25 basis points in its last meeting in November.

The Board decided to cut the Base Rate and reduce downside risks to the economy due to the intensified downward pressure on economic growth caused by the increased volatility of the exchange rate.

Despite all the measures taken, uncertainty prevailed when President Yoon Suk Yeol declared and then revoked martial law in early December, and was subsequently impeached.

An emergency meeting was held by the BOK on Dec. 4, with a commitment to ensure "adequate liquidity" until financial and foreign exchange markets stabilize. This measure will continue until the end of February.

India, the last of the major Asian currencies, experienced a record low of 85.86 on January 8 due to pressure from a strong dollar and selling by foreign portfolio investors in October and November. Despite this, India is facing inflation that surpassed the RBI's 6% upper tolerance limit in October, reaching 6.21%. However, since then, it has moderated.

India's recent GDP reading of 5.4% in its second fiscal quarter ending September missed expectations and marked its lowest level since the last quarter of 2022, as the country faces slowing growth.

The RBI decided to keep interest rates at 6.5% during its December monetary policy meeting, with two board members advocating for a 25-basis-point reduction.

If India decides to lower interest rates to spur growth, it may weaken the rupee. However, the RBI is prepared to handle any sudden outflow of foreign funds and a sharp decline in the rupee.

The Indian rupee has been stabilized due to the central bank's large foreign exchange reserves, according to Citi Wealth's 2025 outlook report.

Peng from Citi describes the rupee as one of the most stable currencies globally, stating that only pegged currencies like the Hong Kong dollar are less volatile. This should provide relief for foreign investors interested in the market.