Treasury Yield Surge Rattles Emerging-Market Currencies in Asia

(Bloomberg) -- Rising U.S. Treasury yields made their first mark on emerging Asian currencies on Friday, with the South Korean won and Indonesia’s rupiah bearing the brunt of a stronger dollar.

The won slumped over 1% while the rupiah dropped as much as 0.8% as the greenback strengthened against most developing Asian and Group-of-10 currencies. Treasury 10-year yields climbed to 1.10%, more than triple the pandemic-driven low reached in March.

The surge in the key global benchmark yield could temporarily halt the dollar’s recent three-month slide and undermine a rally in Asia’s risk-sensitive assets. Regional economies that are reliant on external financing may find their currencies especially vulnerable to any sustained strength in the greenback.

“Higher U.S. yields will likely mean a temporary retracement of Asian currencies,” said Kheng Siang Ng, Asia Pacific head of fixed income at State Street Global Advisors, which oversees $3.15 trillion. “The medium term question is: is this the start of a dollar bull cycle? We generally feel that the dollar should continue to weaken, but it doesn’t mean that this is a straight line.”

The pullback in Asia’s currencies may also reflect a squeeze of dollar-short positions, analysts said. Other than the pegged Hong Kong dollar, all regional currencies rallied in the fourth quarter, with the won gaining almost 8% while the rupiah advanced about 6%.

Emerging-market currencies elsewhere also suffered losses on Thursday, with the Mexican peso sinking 1.8% while the South African rand dropped 2.4%. Indonesia’s bonds, a gauge of demand for Asia’s high-yield bonds, were also sold, with the 10-year yield surging 10 basis points to 6.14% on Friday.

While the dollar is rising this week, there’s still consensus on Wall Street that it will weaken in 2021. Debate is also ongoing over how much higher Treasury yields may climb, with some arguing that it could edge up a bit more, while others see it advancing to 2% after breaching the 1% threshold this week.

Risk-sensitive Asian currencies such as the won and rupiah will likely “remain on the back foot” as U.S. yields climb, said Mitul Kotecha, senior emerging markets strategist at TD Securities in Singapore. “Asian currencies have performed well over recent weeks and as such some near-term consolidation, profit taking should be expected.”

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