Taka's Decline Expected to Continue Amid Central Bank Policy Shifts

Key Takeaway

• Bangladesh's taka is expected to weaken another 2% to 120 per dollar by year-end, following a crawling peg system.
• The central bank's policy shift aims to align the official rate with the market rate, addressing external pressures and foreign exchange reserve issues.
• Broader regional currency pressures persist due to a strong US dollar, impacting other currencies like the Mexican peso and Indian rupee.

Taka's Decline Expected

Bangladesh’s currency, the taka, is anticipated to fall further into record-low territory as the central bank loosens its grip on the currency, according to Moody’s Ratings. The currency is projected to weaken another 2% to approximately 120 per dollar by the end of the year, stated Young Kim, an analyst at the rating firm in Singapore. The taka has already hit a series of record lows in recent days.

The central bank recently introduced a crawling peg system, which will allow the taka to move closer in value to the rate it trades in the unofficial market. This policy shift is part of a package of recommendations from the International Monetary Fund (IMF), which provided Bangladesh with a $4.7 billion bailout program last year. The new foreign-exchange regime aims to help Bangladesh avoid further deterioration in its foreign exchange reserves, a key reason cited by Fitch Ratings for downgrading the nation’s credit score deeper into junk status in May.

“Most of the pressure for Bangladesh is external and was around the fixed-exchange rate that created distortion between the market and the official exchange rate,” said Kim. “That’s why they devalued the taka quite significantly. Reducing that gap helps reduce some of the imbalances.”

Policy Adjustments and Economic Measures

In May, the central bank set the mid-rate at 117 taka per dollar under the new crawling peg exchange rate system, leading to a nearly 8% slide in the currency this quarter. On Tuesday, the taka weakened 0.3% to 117.7 against the greenback, closing at a new low.

In addition to the exchange rate adjustments, Bangladesh is implementing measures to narrow the budget deficit and increase revenues. These measures include slashing spending and raising taxes. The central bank has also made interest rates market-based to curb inflationary pressures, as the nation experienced the fastest pace of price rises in seven months in May.

Broader Regional Currency Pressures

The challenges facing the taka are part of a broader trend affecting Asian currencies, which are under significant pressure due to the strength of the US dollar. The US dollar’s strength is buoyed by increasing US yields, and this trend is expected to continue. The anticipated weaker Chinese yuan (CNY) fixing, as Chinese policymakers address recent market shifts, is likely to further amplify regional currency weakness.

The Mexican peso and the Indian rupee are also experiencing downward pressure. Comments from Mexico’s president-elect Sheinbaum have contributed to the peso’s slide, while the reappointment of Nirmala Sitharaman as India’s finance minister is not expected to provide long-term support for the rupee. The broader theme of downward pressure on emerging-market currencies from a strong US dollar is expected to persist, with upcoming US CPI data and Federal Reserve policy decisions likely to validate recent moves.

Street Views

• Young Kim, Moody’s Ratings (Bearish on Bangladesh's currency):

  "Most of the pressure for Bangladesh is external and was around the fixed-exchange rate that created distortion between the market and the official exchange rate. That’s why they devalued taka quite significantly. Reducing that gap helps reduce some of the imbalances."