Impact of Monetary Policy Uncertainty on Asian Exchange Rates

Abstract

The interest rate hikes of the Federal Reserve System (the Fed) of the United States (US) adversely affected financial stability in emerging markets in 2018. In response to robust economic growth, tightening labor market conditions, and emerging inflationary pressures in the US, the Fed raised the federal funds rate four times by a combined 100 basis points in 2018. The concerted US monetary policy normalization contributed to a general strengthening of the US dollar and risk aversion toward emerging markets. As a result, vulnerable emerging markets such as Argentina and Turkey suffered sharp depreciations of their currencies, triggering concerns about widespread instability in emerging markets. Some Asian currencies, most notably the Indian rupee and rupiah, also fell. The currency depreciations underlined the large impact of US monetary policy on exchange rates of emerging markets.