Asian Currency Markets Under Pressure from U.S. Rates and Tariff Concerns

By Himanshi Akhand

Bearish sentiment surrounding Asian currencies has surged, reaching multi-month highs. The main drivers of this trend include the likelihood of fewer interest rate cuts by the U.S. and the looming threat of tariffs from the U.S. government. This situation has intensified the demand for the U.S. dollar, making it less appealing for investors to hold risky Asian assets, according to a recent Reuters poll.

Short positions on the Chinese yuan have increased to their highest level since June 2023. Similarly, the Malaysian ringgit and the Indonesian rupiah also saw a rise in bearish bets, marking a seven-month high. The yuan, which is already trading near 16-year lows against the dollar, is perceived as particularly vulnerable to a stronger dollar as well as potential tariffs that could come with U.S. policies.

Given that China is the largest trading partner for several Southeast Asian nations, a weakening yuan could negatively impact regional currency markets. Investors are wary as they anticipate the inauguration of President-elect Donald Trump on January 20, during which his tax cuts and tariff strategies could elevate U.S. prices, bond yields, and the overall strength of the dollar.

The U.S. Federal Reserve has indicated a reduction in projected interest rate cuts for 2025, now estimating only one 25 basis-point cut, with a 60% chance of a second cut. This shift in outlook has led to increased worry regarding higher U.S. rates, which could encourage capital outflows from emerging Asian markets and further weaken local currencies.

According to analysts from DBS, the challenging external environment might limit the ability of Asian central banks to implement easing policies. There is an ongoing concern about the weak performance of Asian currencies since the Fed's cut cycle began, with the Federal Reserve having lowered rates by 100 basis points since September 2024.

The currency positioning also points to increased short bets on other Asian currencies. The Taiwan dollar has reached its highest short position since May 2024, while the Indian rupee has recorded its largest bearish bets since July 2022, reflecting its ninth consecutive weekly decline. The Singapore dollar has also seen a rise in short positions, reaching levels not seen since October 2022.

While Singapore may be somewhat protected from direct impacts of U.S. tariff escalations, it remains vulnerable to indirect effects, such as slower global growth and declines in Chinese export performance. Analysts at Citi expect the Monetary Authority of Singapore to potentially ease policy settings in January, driven by recent trends in disinflation and growth challenges.

In the same vein, the South Korean won is now the most shorted Asian currency according to the poll results. It experienced its biggest annual drop in 16 years during 2024, largely overshadowed by export slowdowns and domestic political instability.

The comprehensive poll specifically tracks market positioning concerning nine Asian emerging market currencies: the Chinese yuan, South Korean won, Singapore dollar, Indonesian rupiah, Taiwanese dollar, Indian rupee, Philippine peso, Malaysian ringgit, and Thai baht. The methodology involves analyzing net long or short positions on a scale ranging from -3 to +3, wherein a score of +3 indicates a strong preference for holding U.S. dollars.

In summary, the findings from the survey reveal the following currency positions in relation to the U.S. dollar:

DATE
09-Jan-25 1.65 1.75 1.34 1.20 1.18 1.69 0.99 0.65 0.76
12-Dec-24 1.15 1.86 0.83 0.87 0.82 1.43 0.65 0.53 0.26
28-Nov-24 1.32 1.45 1.12 1.03 1.10 1.13 0.76 1.13 0.66
14-Nov-24 1.14 1.61 0.80 0.81 1.07 0.87 0.65 1.18 0.90
31-Oct-24 0.30 1.06 -0.03 0.59 0.60 0.82 0.11 0.81 0.09
17-Oct-24 -0.43 0.26 -0.44 0.04 0.24 0.67 -0.40 0.26 -0.28
03-Oct-2024 -1.14 -0.79 -1.26 -1.08 -0.59 -0.04 -1.18 -0.70 -1.45
19-Sep-2024 -0.67 -0.90 -1.12 -1.18 -0.66 0.33 -1.30 -1.10 -1.33

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