US Fed-Driven Interest Rate Hike 'Tsunami'... Turmoil in Reverse Currency War

[Image source=AP Yonhap News]

[Asia Economy New York=Special Correspondent Joselgina, Reporter Jeong Hyunjin] Following the U.S. Federal Reserve (Fed), which has implemented three consecutive giant steps (0.75 percentage point increases in the benchmark interest rate), major countries are joining the ranks of interest rate hikes one after another. As the U.S.'s ultra-tight monetary policy causes fluctuations in their own currencies and a sharp rise in government bond yields, they are actively entering what is called the 'reverse currency war.'

The Bank of England (BOE), the central bank of the United Kingdom, held a Monetary Policy Committee (MPC) meeting on the 22nd (local time) and announced a 0.5 percentage point increase in the benchmark interest rate from 1.75% to 2.25%. This decision came amid the dollar-to-pound exchange rate hitting its lowest level in 37 years. The BOE, which was the first among major central banks to enter a tightening cycle last December, has raised rates seven consecutive times including this one.

On the same day, the Swiss National Bank (SNB) also raised its benchmark interest rate by 0.75 percentage points, ending the era of negative interest rates in Europe. The Norges Bank also increased its benchmark rate from 1.75% to 2.25%, a 0.50 percentage point hike.

In the Asian market, Hong Kong raised its rate by 0.75 percentage points. Hong Kong operates a 'dollar peg system' that links the Hong Kong dollar's value to the U.S. dollar. The Philippines also raised its rate by 0.5 percentage points to 4.25% on the same day. Taiwan, which has continued its tightening stance in two monetary policy meetings held earlier this year, implemented a 0.125 percentage point increase. Indonesia raised the 7-day reverse repurchase agreement (RRP) rate, used as its benchmark rate, to 4.25%, and also increased deposit and loan rates for banks by 0.5 percentage points to 3.5% and 5.0%, respectively. South Africa also raised its repo rate by 0.75%.

The U.S. Wall Street Journal (WSJ) referred to this as a "Super Thursday," noting that central banks from Norway to South Africa raised rates more than expected during their meetings.

[Image source=Reuters Yonhap News]

While domino-like interest rate hikes continue worldwide, only Japan and T?rkiye are taking the opposite path by focusing on growth rather than inflation and maintaining monetary easing policies. Instead, as their currencies sharply depreciate due to the interest rate gap with major countries like the U.S., their foreign exchange authorities are taking direct measures.

The Bank of Japan (BOJ) announced at its Monetary Policy Meeting held on the same day that it would keep the short-term interest rate at -0.1% and maintain its monetary easing policy by guiding the 10-year government bond yield, a long-term interest rate indicator, to around 0%. Following the BOJ's decision, the yen exchange rate surged to the high 145 yen per dollar range, and the Japanese Ministry of Finance and BOJ intervened in the foreign exchange market by buying yen and selling dollars. This was the first time in 24 years since June 1998 that Japan intervened in the foreign exchange market by purchasing yen.

The Financial Times (FT) described this as an intensifying "reverse currency war," where central banks seek ways to raise their currency values against the dollar.

T?rkiye lowered its benchmark interest rate from 13% to 12%. Despite inflation reaching its highest level in 24 years and the lira hitting an all-time low, T?rkiye has continued monetary easing policies, having lowered the benchmark rate from 15% in December last year to 14%, then again to 13% last month.

With expectations that the Fed's aggressive tightening will continue, government bond yields are rallying amid successive rate hikes by various countries. The U.S. 10-year Treasury yield surpassed 3.7%, reaching its highest level since 2011, and the 2-year Treasury yield rose for 11 consecutive days, marking the longest streak in 30 years, Bloomberg reported. According to the Chicago Mercantile Exchange (CME) FedWatch, the probability that the Fed will take a giant step in November is priced at 71% in the federal funds (FF) futures market.

This content was produced with the assistance of AI translation services.