Kevin Warsh’s early experience leading the Federal Reserve starkly reminded us that the U.S. central bank does not always act in the best interests of international markets when it comes to monetary policy.
Wash hinted he would focus on controlling inflation. The Federal Reserve chair took a more hawkish stance than expected during his first policy meeting, with officials leaning toward raising interest rates this year. This came as a surprise, given that Wash had previously supported President Trump’s loose monetary policy before taking office last month. The dollar rose sharply in response and is poised for a relatively strong period—precisely what struggling Asian currencies can least afford.
Given Asia’s reliance on exports, it needs a healthy U.S. economy with stable prices and strong consumer spending. However, Asia does not want this to come at the expense of its own interests. Some major countries have already invested heavily in market interventions, driving up borrowing costs. They had hoped the Federal Reserve would temporarily halt such actions.
This is especially true for Japan. Despite the Bank of Japan raising interest rates five times since 2024, the yen has continued to weaken. If Wash’s remarks were more cautious, it might offer a short-term boost to the yen, which is currently hovering near its lowest level since 1986. Over the past few years, Tokyo has intervened in the market multiple times, most recently to prevent the yen from falling below the 160-yen-per-dollar threshold.
On Friday, traders closely watched for further measures to support the yen. The yen has recently traded around 161, slightly below its level in late April, which had previously triggered a prior round of intervention. Over the month ending May 27, Japan deployed an unprecedented $74 billion to prop up the currency. The government led by Prime Minister Sanae Takaichi could choose to inject more funds to maintain this range or wait for the yen to weaken further before intervening. Given the strong momentum of the dollar this week, Takaichi’s intervention may not receive the same level of support as it did six weeks ago.
Japan might be better off holding back and waiting for the dollar bulls to overextend. Timing and intent behind intervention are equally important. Officials typically aim to shift market sentiment, and given the unexpected message conveyed by Wash, this could take some time. Betting on further Bank of Japan rate hikes is unlikely to have much impact.
Japan is not the only country facing this new reality. A strong dollar has given Asian capitals an opportunity to reassess their options. Indonesia and India’s currencies have also been severely hit, possibly making them more in need of China adopting a more moderate tone. This may well be the breathing space that South Korea and the Philippines are hoping for.
Asia is not an isolated case. The Turkish lira, one of the worst-performing emerging market currencies this year, has had to seek help from countries beyond Washington. With the position of Turkey’s central bank governor under threat, the outlook is far from optimistic: President Recep Tayyip Erdogan has shown no hesitation in dismissing monetary policy chiefs who pursued aggressive tightening measures. Erdogan may now be forced to raise interest rates several times. The South African rand and the Chilean peso are currently holding up reasonably well, but could soon lose their favor.
The biggest impact from the Federal Reserve’s policy shift may come from Southeast Asia, with Indonesia bearing the brunt. Over the past year, as the Indonesian rupiah plunged to a historic low, the central bank has repeatedly intervened in the market. But this month the situation has worsened, with the rupiah breaking below the key threshold of 18,000 per U.S. dollar, triggering a sharp drop in demand for Indonesian government bonds. This forced the central bank to urgently raise interest rates by 25 basis points and again increase them by the same amount on Thursday.
These unconventional measures have temporarily eased market pressure. Jakarta could have gained more time to adjust its policies and restore market confidence. Scrutiny of President Prabowo Subianto and his team will intensify—rumors suggest the finance minister might be replaced.
