Lloyd Chan, senior currency analyst at MUFG, notes that improved diplomatic signals in the Middle East have increased risk sentiment, weakening the US dollar (USD) and supporting the Asian currency. However, high U.S. Treasury yields continue to underpin the dollar and bond markets remain cautious. Chan stresses that Asian currencies have rebounded in anticipation of a quicker resolution, but warns that recent gains could prove uncertain if diplomacy stalls.

The de-escalation narrative lifts Asia FX

“On the currency front, the US dollar also weakened on improved risk appetite, but continued high US interest rates maintain a supportive environment for the dollar, with US 2-year bond yields remaining above the Fed effective funds rate (albeit falling). Bond markets appear to continue to signal some caution about the de-escalation narrative.”

“Meanwhile, the Asian currency has also rebounded as market valuations require a quicker resolution. If there is indeed a quick and credible path to resolution, recent optimism may persist, which will impact our medium-term view of an eventual weakening of the dollar. However, if diplomacy fails and optimism wanes, the US dollar may remain supported for longer, while recent Asian currency gains appear more risk-prone with energy prices still high.”

“Encouragingly, the strong growth in high-tech manufacturing in China is supported by Taiwan’s March export data, which showed a sharp 61.8% year-on-year growth, driven mainly by semiconductors and electronics. This reinforces our belief that the regional technology recovery cycle remains intact. In this context, technology-oriented currencies such as TWD, KRW, SGD and MYR are expected to continue to gain.”

(This article was created with the lend a hand of an artificial intelligence tool and has been reviewed by an editor.)