HONG KONG -- The intensifying trade war between the U.S. and China is causing Asian currencies to fall as concern about the effect on the Chinese economy drives risk-averse investors out of the region.
The South Korean won and the New Taiwan dollar both reached 28-month lows on Friday. The won softened as far as 1,196 against the dollar at one point, down well over 2% from the end of April, while the Taiwanese currency touched 31.4 to the greenback. The Philippine peso and the Indonesian rupiah also have each weakened more than 1% so far this month.
The decline marks a turnaround from a period of relative strength earlier this year, thanks partly to the U.S. Federal Reserve putting interest rate hikes on hold. The yuan strengthened more than 2% between the end of 2018 and the end of April, with the peso and the rupiah firming up as well.
But hopes of Washington and Beijing closing in on a deal were dashed when the U.S. raised tariffs on $200 billion in Chinese goods last week. The dominant view in markets is that China will suffer more than the U.S. from an escalation of the trade war, and Washington's recent move to restrict exports to Huawei Technologies suggests tensions will not let up anytime soon.
South Korea is particularly vulnerable to trade-related risk because China buys such a large share of its exports, said Frances Cheung, head of macro strategy for Asia at Westpac Banking. She said the types of products South Korea sells to China, such as machinery, likely make the impact more severe. Taiwan is also closely connected with China in supply chains for high-tech products.
While a weaker currency improves a country's competitiveness as an exporter, more attention is likely to be paid now to the negative effects of depreciation, such as higher import prices.
Indonesia and the Philippines, meanwhile, both suffer from structural weaknesses such as current-account deficits and tend to be shunned when investors seek safety. As of last month, the peso and the rupiah had each strengthened compared with the end of 2018, but both have now lost ground for the year so far.
The increasingly tense situation surrounding Iran risks complicating the situation further. Many Asian monetary authorities are loosening policy, with the Philippine central bank cutting its benchmark interest rate this month for the first time in six and a half years, but further moves in that direction could be difficult should higher crude oil prices drive up inflation.
On the equities side, the MSCI Emerging Markets Index has plunged over the past month. While the situation differs from last year, with U.S. rate hikes now on hold, developing economies in Asia and elsewhere are likely to remain at the mercy of factors out of their control.