The recent improvements in the economic reports for USA had made credit rating agencies revise their rating to a positive outlook for the US economy. This bright forecast has strengthened the US Dollar, especially against the Asian currencies that took a heavy beating in the past few days against a strengthening US Dollar. India, one of the leading emerging economies of Asia bore a major brunt of this sudden rise in US dollar. The Indian rupee touched a record low of 58.98 on Tuesday (June 11, 2013) due to a high demand for the US Dollar. 

Other Asian countries like Japan also suffered temporarily at the hands of a strengthening US Dollar. But, Japan unlike other Asian countries, was already struggling with a sluggish economy that seems to provide no appreciable growth-response to any amount of economic stimulus. Other emerging economies like Brazil and South Africa also saw a steep decline in their currencies against the newly strengthened US Dollar. The Brazilian Real has declined by more than 9% against the dollar, while the South African Rand had fallen about 1.1% on Tuesday alone to record a 16% decline from the beginning of this year.

But investors are still puzzled as to how the Asian economies that have been resilient to the effects of global recession post such heavy falls in intraday trade against a sudden strengthening of US dollar? After all, these emerging Asian economies have posted a modest yet steady growth even during a downturn in the US and European economies.

As we explore the causes, we find that the positive outlook on the US economy has stoked fears of an early wind-up of the US Federal Reserve’s QE policy. This would in turn increase the low interest rates from its current near-zero position in the US bond markets. This has undoubtedly infused a positive sentiment towards the US debt market increasing the demand for the US bonds. Now, the more attractive US bond market has caused the FIIs (Foreign Institutional Investors) to pull out of the Asian debt markets. In India alone, the FIIs are reported to have pulled out of the debt assets to a tune of about $1.3 billion dollars in the past week. This has caused widespread panic among investors in these emerging Asian currency markets, causing a huge surge in the Stop-loss orders and fresh openings of Short-Sell positions. All of these further pushed the rupee down to new lows in the intraday trade, before it could attempt any recovery.

Additionally, the crude oil consumption of the Asian economies has been rapidly increasing for the past decade. According to the recent reports from U.S. Energy Information Administration (EIA), the Asian economies crude oil imports led by Chinese demand has jumped more than 50% to a record high of 44.5 million bpd in April, 2013. This, for the first time in the history, has enabled the Asian emerging economies’ oil consumption to pip past the 44.3 million bpd oil demand of the wealth western countries of OECD (Organization of Economic Cooperation and Development) in April. With the Asian economies leading in crude oil consumption, any strengthening in dollar against their currencies would further increase the worries of an increase in trade deficits. This is would further cause a decline in the demand for their bond markets.

Thus, the sudden rise in the US Dollar’s value, with a waning interest in the Asian debt market and a more attractive US bond market, seems to be the major market movers against the Asian and emerging economies’ currencies. However, analyst and experts are confident that this trend is only temporary, as inflation and Current Account Deficits (CAD), major threats to currencies, are dissipating gradually, especially in leading Asian economies like India.