The irony of expectations of interest rate changes overseas – specifically the US – having a bigger impact on Asian currencies this year than any actual movements by the Fed or regional central banks will not be lost on businesses that trade with the world’s largest economy.

Higher US yields amid firmer US economic data has helped to propel the dollar higher, which has weighed on Asian currencies. As such, relative interest rate differentials have been an important factor driving major Asian currencies this year, with the attraction of higher US rates drawing capital away from the region.

“Currently there are outflows from Asia’s bond markets as higher US yields and a strong dollar make it less attractive for investors in Asian local currency bonds,” says Mitul Kotecha, Head of FX & EM Macro Strategy Asia at Barclays. “Central banks in the region will also be slower to ease policy amid varying FX pressures.”

Since India is less exposed to US interest rates, Kotecha expects the Reserve Bank of India to ease policy gradually. In Australia, markets are pricing in limited policy easing in the months ahead with the Reserve Bank of Australia likely having less impetus to cut rates.

Robert Carnell, Head of Research and Chief Economist for Asia Pacific at ING agrees that by far the biggest influence on Asian currencies in 2024 has been the ebb and flow of rate cutting expectations for US rates, which have veered from about 175bps of easing at the beginning of the year when analysts were still expecting a US recession to barely 50bps when downward inflation progress seemed to stall.

“Looking ahead, China will probably ease rates more to help its beleaguered economy though so far this has been done in small steps and this cautious trimming of rates will likely continue as policy rates are already low, banks’ net interest rate margins are thin and currency stability remains a goal,” he says. “Moreover, cutting rates is not much of a demand boost when demand for borrowing remains very weak.”

Korea’s central bank needs to balance the needs of a faltering domestic economy with high household debt levels. Korea doesn’t look like easing again this year and may only cut rates by 25bps in 2025.

Carnell explains that Donald Trump’s victory has not only encouraged thoughts of inflationary trade tariffs on the region and dampened Fed rate cutting expectations – he is also expected to introduce expansionary corporate tax cuts.

“Deregulation may remove some of the inflationary sting from such policies but not all of it and for the time being, Fed rate cut expectations continue to be trimmed, which is helping to buoy the dollar,” he says. “Where this ends is unclear but for the time being, the Trump trade remains strong – and that means weaker Asian FX and lower opportunities for local Asian rate cuts.”

In addition to China, where tariff rates of 60% have been floated from the Trump camp, other Asian currencies may also have grounds for anxiety. China’s bilateral trade surplus with the US is lower now than it was under Trump’s first presidency, but this has been more than offset by increases in the bilateral deficits of other economies with Vietnam, Malaysia and some of the north Asian economies (Taiwan, South Korea) seeing their surpluses with the US increase.

“Perhaps this time round it will be more of a blanket Asian trade war rather than a pure US-China play,” suggest Carnell. “It is worth considering that of the eight economies on the US Treasury’s currency manipulator monitoring list, seven are in Asia. The outlook for 2025 could be a tricky one for Asian FX and rates.”