(Bloomberg) -- Investors are looking for the next policy domino to fall in Asia amid an escalating campaign against a resurgent dollar, after Indonesia used a surprise interest rate hike to defend the rupiah.

The currencies of Japan, South Korea, Thailand, Taiwan, Malaysia, the Philippines and India are all trading within sight of multi-year lows, raising the odds for local authorities to take firmer action to stem the slide. Won and ringgit swaps, for example, are already pricing in a less dovish stance by the two local central banks.

Indonesia’s unexpected monetary tightening this week demonstrates the precarious position of central banks as they grapple with the outlook of higher-for-longer US interest rates. Policymakers across Asia must choose between damping economic growth or protecting exchange rates that are in free-fall. 

“The surprise hike by Indonesia’s central bank will certainly let other EM central bankers sit up straight,” said Frederic Neumann, chief Asia economist at HSBC Holdings Plc. “Even as inflation has normalized across much of Asia, the specter of further dollar strength is keeping central bankers in the region on the defensive.”  

While China has been contending with a housing crisis, lackluster growth and a weak yuan for months, countries like the Philippines also started the year with the prospect of rate cuts. But the picture shifted after sticky US inflation prompted traders to push back bets on the timing of policy easing by the Federal Reserve.

The prospect of a less dovish Fed means the pick up in US yields relative to Asia may remain high, likely spurring a withdrawal of global funds from the region and driving down local currencies. As such, India is set for its first month of debt outflows in more than a year, while Thailand and Indonesia are also recording net fixed income withdrawals.  

Both Japan and Taiwan raised interest rates in March, though their currencies have since declined. The yen weakened beyond 155 per dollar for the first time in more than three decades this week, fueling risks of intervention by authorities. The rupiah likewise sank as much as 0.4% on Thursday despite Indonesia’s rate hike, spurring bets of more tightening to come.

The Bank of Thailand said Wednesday that the decision earlier this month to keep rates steady provides policymakers options to deal with unexpected global and domestic challenges.

The Reserve Bank of India similarly struck a hawkish tone at its April policy review, with economists pushing back their expectations for rate cuts, given growth rates of above 8%. 

In the Philippines, the peso’s current slump may not spur a rate hike yet, according to the finance secretary who also sits on the monetary board. Authorities are also keeping a close eye on inflation as they risk missing their 2%-4% target for the third straight year in 2024.

Policymakers are already resorting to other methods to stem the exchange-rate slide, from verbal warnings in South Korea to pleas by officials in Malaysia and Indonesia for companies to convert their overseas earnings. India, Indonesia, Thailand and Vietnam have all intervened to defend their currencies. 

Unless inflation flares up anew, central banks may opt for intervention instead of interest rates as a first response, especially as they have ample foreign reserves to run down, said Wee Khoon Chong, senior Asia Pacific market strategist at BNY Mellon.

“Not every central bank will use policy rates to support their currencies,” said Fiona Lim, a senior currency strategist at Malayan Banking Bhd. “It depends on whether the economy is able to withstand higher interest rates. There are other ways to support currencies.”

--With assistance from Marcus Wong, Harry Suhartono, Anup Roy and Matthew Burgess.

(Updates with comments from Philippine finance chief and BNY Mellon.)

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