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Dollar Loses Luster Against Asia's Top Performing Currency of 2020

Khine Lin Kyaw and Chester Yung
·4 min read

(Bloomberg) -- Zaw Moe Ko was happy that his boss in Myanmar’s commercial center of Yangon pays him in dollars -- until the pandemic struck. Now he can’t get rid of them fast enough.

“I feel safer now when I have kyat rather than U.S. dollars,” he said, in what’s become a more widespread vote of confidence in the local currency. “If I only have U.S. notes, it will be hard for me to buy goods in a local market.”

In a year that’s upended so many norms, the dollar’s crown has slipped. The world’s reserve currency is trailing its Group-of-10 peers, but its slide is most evident in some shallower markets on the fringes of global finance. The kyat has gained as much as 11% versus the dollar -- Asia’s best performance. The surge is an amplified version of what’s played out in many emerging markets as stay-at-home orders have slashed discretionary spending and sent imports tumbling.

And the dollar’s losses have compounded as it’s surrendered much of its haven status to the local market. Restrictions on movement have made locals nervous of relying on the greenback, as money-changers may not be available to convert their U.S. notes to kyat for essentials such as groceries.

Myanmar’s authorities banned domestic travel and re-imposed a strict stay-at-home order in Yangon province, home to the nation’s commercial hub, after new cases and deaths began soaring in late August. People have increasingly relied on kyat to buy critical supplies such as food and medicines rather than spending on travel, clothes and other fashion items, said Than Lwin, senior consultant at Kanbawza Bank and a former deputy governor of the central bank.

The kyat’s dependability in a chaotic time contrasts with its volatile reputation. The kyat fell about 12% in 2018, the year the central bank eliminated its trading band. Inflation, which hit 9.2% in February, has eroded its value. Times were worse in the 1980s under military rule, when snap de-commissioning of bank notes wiped out many people’s savings.

Seeking Stability

Demand for the currency has increased with the expectation that it would continue to appreciate, coupled with the fact that small trades can have big impacts in low-traffic markets, according to the World Bank’s Myanmar Economic Monitor.

The Central Bank of Myanmar is now emphasizing currency stability. Similar to its peers in larger economies such as Thailand and South Korea, policy makers have bought dollars to prevent volatility from hurting the competitiveness of their exports.

CBM bought $156 million of the U.S. currency in the second half of the year through Dec. 23, to build foreign reserves and smooth volatility, said May Toe Win, the director-general of foreign exchange management at the monetary authority. The currency has also backtracked in recent weeks in line with expectations of a recovery that would revive consumption, and a seasonal bump in car imports.

“When business return to normal, it may lead to some depreciation of kyat as imports might increase,” she said.

Read more: Myanmar’s Trade Reaches $36.7b in 2019-20, Exceeds Target

The country’s de facto leader Aung San Suu Kyi said the government is reviewing options to gradually ease Covid-19 restrictions for the economy despite the recent surge of virus cases. Earlier in December, the nation allowed restaurants and tea shops in townships exempted from the stay-at-home order to reopen.

The kyat’s strength is likely to partially reverse “as economic activity starts to normalize,” said Khoon Goh, head of Asia research at Australia & New Zealand Banking Group Ltd. in Singapore. He sees demand for dollars recovering further, driving the kyat toward 1400 by the end of next year, from its current level of around 1342.

The view on the ground is more skeptical. “In the past, I didn’t sell all of the dollars I got as my salary because I wanted to keep some notes for the sake of my future,” said Zaw Moe Ko. “But as the second wave worsened from what I expected, I decided to sell them all and bought some gold instead.”

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