Economy

MUMBAI/SINGAPORE (Reuters) -Central banks from Brazil to Indonesia scrambled to defend their struggling currencies on Thursday, hours after the Federal Reserve jolted markets by indicating it may not cut rates by much next year. The Fed’s tacit acknowledgement of the inflationary risks likely to come from incoming president Donald Trump’s immigration and trade policies unnerved investors.U.S. Treasury yields rose, sending the dollar to its highest in two years against six major rivals.The South Korean won dropped to its lowest level in 15 years, the Indian rupee to a record low and the Indonesian rupiah to a four-month low. MSCI’s index of emerging markets currencies also hit a four-month low.Higher U.S. rates could lead to a return of last year’s currency and capital flows problems that emerging markets were barely recovering from. The dollar’s yield advantage could drive capital out of their markets while weakening their currencies, potentially spawning inflationary pressures and market volatility.On Thursday, central bankers from South Korea to India to Indonesia were quick to take action, defending their currencies by selling dollars along with strong verbal warnings. India’s central bank sold dollars to support the rupee as it plumbed an all-time low, weakening past the 85 to the dollar psychological level. “The pace of the selling in US Treasuries has been a massive green light for FX traders to re-engage with dollar longs, and they have done so liberally, with emerging market FX being carved up,” said Chris Weston, head of research at Australian online broker Pepperstone.HSBC’s chief Asia economist Fred Neumann said a more hawkish Fed “ties the hands of emerging market central bankers”.”While in the short-term, FX intervention by EM central banks in Asia can help soften the impact from the Fed’s hawkish tilt, over time local monetary policy will require adjustment as well,” he said.The Brazilian real sank overnight to a lifetime low, and an initial $3 billion intervention on Thursday morning, announced the day before, failed to lift the currency substantially. A second $5 billion intervention did trigger the expected response and the real ended the session up over 2%.Central banks in Indonesia and Thailand said they would act to prevent excessive volatility. Indonesia’s central bank voted on Wednesday against a rate cut which would have helped the economy, focusing instead on currency stability, a development analysts said underscores the challenge many other central banks will face. South Korea’s won, the worst performing Asian currency this year with a 12% decline, touched a 15-year low, with authorities suspected of defending the 1,450 per dollar level. Onshore won trading closed at 1,451.9 per dollar. The People’s Bank of China supported its currency by heavily dampening the daily reference rate, which analysts said was aimed at keeping the dollar in check. The yuan still stayed at a 13-month low, sliding past the psychologically important 7.3 per dollar level. “While Asian central banks can attempt to smooth out the depreciation pressures, reversing them entirely seems unlikely in the near term,” said Charu Chanana, chief investment strategist at Saxo.”Previously, high-yield Asian currencies had some support from carry trades, but the current high volatility may threaten the sustainability of this strategy.”The Fed’s latest rate projections mean it is likely to cut rates only twice next year, down from its previous estimate in September of four cuts in 2025. The Fed’s hawkishness is an added burden on emerging markets already reeling from the Trump’s tariff threats. Trump’s expected trade policies alongside likely tax cuts and deregulation have boosted the U.S. growth outlook, spurring a rally in the dollar and U.S. rates.”The dollar is king right now,” said Bart Wakabayashi, Tokyo branch manager at State Street (NYSE:STT). More

WASHINGTON (Reuters) – A group of 37 Democratic lawmakers on Thursday urged the U.S. Trade Representative’s office to press ahead with efforts to weaken investment protections in U.S. trade agreements after the U.S. Chamber of Commerce alleged that the Biden administration was pursuing “secret” talks on the matter.The lawmakers, led by Representatives Lloyd Doggett and Rosa DeLauro and Senator Sheldon Whitehouse, have long urged that investor-state dispute settlement (ISDS) provisions be eliminated from U.S. trade deals.ISDS mechanisms allow companies investing in trade partner countries to bypass local courts to settle government disputes through external tribunals.”We strongly encourage you to act urgently to eliminate or drastically reduce the ability of multinational corporations to use ISDS tribunals as a tool to attack legitimate government actions and extract unlimited sums from countries’ taxpayers,” they wrote in the letter, seen by Reuters, to U.S. Trade Representative Katherine Tai.The U.S. Chamber of Commerce last week said it sent Freedom of Information Act requests to USTR over what it called “secret” conversations aimed at renegotiating the investment chapters in U.S. free trade agreements with Colombia and with Mexico and Canada. The requests seek more information on the matter, which the Chamber says would lead to “substantive changes to investment protections.”The top U.S. business lobbying group said weakening the provisions would be “a gift to our trading partners” and would weaken U.S. efforts to encourage investments to shift supply chains from China to the Western Hemisphere.A USTR spokesperson said the Chamber’s accusation of secret negotiations was false, and that the Chamber had a “history of making inaccurate claims about USTR under the Biden-Harris administration.”Any move to open talks with Colombia, Mexico or Canada by the Biden administration may not be completed before President Donald Trump takes office on Jan. 20 — even as a “side-letter” to core text that would not require congressional approval.But Trump took a critical view of ISDS provisions in trade deals. His trade representative, Robert Lighthizer, sought to eliminate them in a revamp of the North American Free Trade Agreement, saying they were akin to political risk insurance that encouraged the outsourcing of U.S. jobs to low-wage countries.In the succeeding U.S.-Mexico-Canada Agreement negotiated by Lighthizer and enacted in 2020, ISDS was eliminated completely between the U.S. and Canada, and largely with Mexico except in certain large state-dominated sectors such as energy and telecoms.ISDS remains fully available in the U.S.-Colombia free trade agreement, and the country’s leftist president, Gustavo Petro, has made comments suggesting he wants to renegotiate the provision that has led to large damage claims by U.S. firms. The letter from Democrats cites demands from American and Canadian mining companies of $16.5 billion in damages over Colombia’s creation of a national park to protect the Amazon (NASDAQ:AMZN) rainforest and prohibit mining. They called the claim “exorbitant” on an investment amounting to only $11 million.”We urge you to work with any willing trade partners to end the ongoing harm caused by ISDS,” the lawmakers wrote, adding that this could be achieved with bilateral executive agreements. More

(Reuters) – A look at the day ahead in Asian markets. As the dust settles on a remarkable 24 hours of central bank activity, investors in Asia round off the last full trading week of the year hoping for some respite from the global market selloff sparked by the Fed’s ‘hawkish cut’ on Wednesday.These nerves were partially soothed on Thursday by the Bank of England’s surprisingly ‘dovish hold’ and the Bank of Japan’s seeming ambivalence toward raising rates in January. Some of Wednesday’s moves reversed on Thursday – volatility cooled, a bit of the froth in implied U.S. rates came off, and FX intervention from several emerging market central banks helped support EM currencies. Brazil’s real bounced off a record low and South Korea’s won from a 15-year low.But the genie of a ‘higher for longer’ Fed is out of the bottle. Wall Street failed to rebound, the dollar hit another two-year high, lifted by its gains against the Japanese yen, and Treasury yields leaped again. The 10-year yield nudged 4.60%, its highest since April and up almost 100 basis points since the Fed’s easing cycle began in September.Soaring U.S. yields and a booming dollar – and add to that now a notable correction in emerging equities – have tightened EM financial conditions significantly. They are now the tightest since April, according to Goldman Sachs. The heavy selling pressure on EM assets is unlikely to lift much as long as the U.S. dollar and yields stay high, and the threat of large tariffs from the incoming Donald Trump administration in Washington looms large.Analysts at JP Morgan estimate that net capital outflows from EM countries in October totaled $105 billion – $75 billion out of China alone – marking the worst month since June 2022. November and December have continued to post outflows too, albeit more modest.”We do not rule out more outflows in 1Q24 should the dollar continue to strengthen and/or sentiment sour. Central to the outlook will be how residents react. October’s data suggest that residents could also be sending their flows elsewhere,” JP Morgan’s Katherine Marney wrote this week.Friday’s calendar in Asia is busy, with Japanese inflation and an interest rate decision in China grabbing the spotlight. BOJ Governor Kazuo Ueda said on Thursday that underlying inflation in Japan remains moderate. But the yen’s persistent weakness could soon shift that dial. Economists expect November’s annual core inflation rate to have risen to 2.6% from 2.3% in October.Meanwhile, the People’s’ Bank of China is expected to leave its benchmark one- and five year lending rates on hold at 3.10% and 3.60%, respectively.Beijing has pledged to take a range of fiscal and monetary steps next year to stimulate economic activity, fight off deflation, and support markets. Here are key developments that could provide more direction to markets on Friday:- China interest rate decision- Japan CPI inflation (November)- Malaysia CPI inflation (November) More

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This is an on-site version of the White House Watch newsletter. You can read the previous edition here. Sign up for free here to get it on Tuesdays and Thursdays. Email us at whitehousewatch@ft.comGood morning and welcome to White House Watch. We will be off next week — have happy holidays! For now, let’s get into:Donald Trump’s economic plans are hanging over the US Federal Reserve and chair Jay Powell.The central bank lowered interest rates yesterday by a quarter-point, but officials also projected fewer cuts next year as they start to factor in Trump’s proposed economic policies [free to read]. Powell jolted financial markets yesterday as he struck a very guarded tone about how much the bank will be able to lower interest rates against a backdrop of rising inflation risks.A few months ago, Fed officials had pencilled in one percentage point worth of rate cuts throughout 2025. Now, they’re forecasting just two quarter-point decreases for the year, underscoring policymakers’ concerns about lingering inflation.Some content could not load. Check your internet connection or browser settings.They also raised their inflation expectations for next year amid fears that Trump’s policies could bring higher prices, lower growth and greater volatility.“This was an unabashedly hawkish message from the Fed,” Aditya Bhave, senior US economist at Bank of America, told the FT’s Colby Smith, adding that officials’ forecast for two quarter-point rate cuts in 2025 represented a “wholesale shift”.During his press conference yesterday, Powell said some members of the rate-setting Federal Open Market Committee had begun to consider the potential effects of Trump’s proposals.“Some did identify policy uncertainty as one of the reasons for their writing down more uncertainty around inflation,” Powell told reporters. “We just don’t know really very much at all about the actual policy,” he said. “We don’t know what will be tariffed, from what countries, for how long, in what size. We don’t know whether there’ll be retaliatory tariffs. We don’t know what the transmission of any of that will be into consumer prices.”Dean Maki, chief economist at Point72, called the shift “striking” and said it was rooted in speculation about Trump: “It’s hard to see why they would have expected so much higher inflation if they are not incorporating things like tariffs into the forecasts.”Some content could not load. Check your internet connection or browser settings.Transitional times: the latest headlinesWhat we’re hearingThe pace of Trump’s meetings with US CEOs is accelerating as business leaders contort themselves to get time with the president-elect — even if their politics don’t align.As one Washington lobbyist told the FT’s James Politi and James Fontanella-Khan:It takes a lot for an uber-wealthy, creative-type CEO, many of whom lean left, to suck it up and deal with Trump.But what choice do they have?Within Trump’s orbit, the slew of meetings is being cast as a vote of confidence in his incoming administration and economic policies. But corporate America still has serious concerns about the president-elect, especially his plans to enact sweeping tariffs, push mass deportations and roll back some manufacturing subsidies.No matter their true thinking, executives have learned a crucial lesson: it’s better to indulge Trump’s need for exuberance and flattery than to criticise him and risk public rebukes and retaliation.Nikki Haley, Trump’s former US ambassador to the UN who battled him in the Republican primaries, told the FT that “I’m not talking to any CEOs that are fearful of Trump”.Now vice-chair of consultancy Edelman, where she advises companies on how to handle Trump, she said: What I tell CEOs is that it’s good to get face time with President Trump. It’s good to let him know what you’re working on. It’s good to let him know how you’re growing business.ViewpointsRecommended newsletters for youFT Exclusive — Be the first to see exclusive FT scoops, features, analysis and investigations. Sign up hereBreaking News — Be alerted to the latest stories as soon as they’re published. Sign up here More