Asian currencies gain as US dollar weakens

[WORLD] A broad rally across Asian currencies gained momentum this week as the U.S. dollar continued to face downward pressure, driven by growing expectations of interest rate cuts from the Federal Reserve and a softening U.S. economic outlook. The Indian rupee, Thai baht, Malaysian ringgit, and Indonesian rupiah all posted notable gains, signaling renewed investor confidence in emerging Asian markets.

Market analysts attribute the currency strength to a "Goldilocks" environment—moderate growth, declining inflationary pressures, and easing monetary policy in the United States—which has improved the investment appeal of Asian assets.

Dollar Weakness Sparks Regional Gains

The U.S. dollar index fell to a multi-month low of 98.2 this week, extending its downward trend as the Federal Reserve signaled a more dovish policy stance. Investors are now pricing in multiple rate cuts beginning in the second half of 2025, following recent economic data showing a slowdown in U.S. manufacturing and consumer demand.

"The dollar’s trajectory is clearly on the downside as rate cut expectations solidify," said Mohit Kumar, Chief Economist at Jefferies. "This creates room for emerging market currencies to rebound, particularly in Asia where fundamentals are improving."

Rupee, Baht, Ringgit Among Top Performers

Among the regional currencies, the Indian rupee appreciated by nearly 0.8%, closing at 85.37 per dollar on Thursday. Strong foreign portfolio inflows—estimated at over $1.5 billion in the past week—helped bolster the rupee, amid easing U.S.-China trade tensions and steady domestic economic indicators.

The Thai baht gained 0.7%, supported by improved sentiment around tourism recovery and a rise in regional exports. Analysts point to Thailand’s current account surplus and stable inflation outlook as favorable tailwinds.

The Malaysian ringgit jumped as much as 1.5% to trade at 4.3678 per dollar—its strongest level since early 2023. The move was underpinned by positive growth projections and reduced political risk following the formation of a stable coalition government.

The Indonesian rupiah also saw modest appreciation, driven by resilient commodity exports and reduced reliance on external debt funding.

Outlook: Favorable Conditions for Asia’s FX Markets

Experts note that Asia’s improving macroeconomic outlook, combined with easing dollar strength, could continue to support regional currencies in the coming quarters.

“The landscape for Asian foreign exchange markets looks increasingly favorable,” said Maybank FX strategist Saktiandi Supaat. “With inflation broadly under control and U.S. monetary tightening in retreat, there’s scope for capital inflows to sustain regional currency strength.”

However, risks remain. A sudden reversal in Fed policy or a flare-up in geopolitical tensions—particularly in the Taiwan Strait or Middle East—could reverse recent gains.

Monetary Policy Divergence Driving Flows

As the U.S. moves toward policy easing, several Asian central banks have maintained a cautious approach. India’s Reserve Bank has kept its key repo rate steady at 6.50%, signaling a preference for macroeconomic stability. Similarly, Bank Negara Malaysia and Bank Indonesia have adopted a wait-and-see approach.

This divergence in policy trajectories is encouraging carry trade activity, where investors borrow in lower-interest currencies to invest in higher-yielding assets—adding further support to Asian currencies.

The recent appreciation in Asian currencies reflects a complex interplay of global and regional factors, with the weakening U.S. dollar providing a significant tailwind. While challenges remain, including geopolitical risks and varying domestic growth rates, the near-term outlook for Asia's foreign exchange markets appears optimistic.

Continued capital inflows, stable inflation, and growing expectations of U.S. interest rate cuts suggest that the rally in regional currencies could extend well into the second half of 2025.