Asian Currency Index Falls to Two-Decade Low on Fed, Tariff Bets

The Asian Currency Index (ACI) has plummeted to a two-decade low, reflecting a perfect storm of geopolitical tensions, trade tariffs, and Federal Reserve (Fed) policy. The ACI, which tracks the performance of 13 Asian currencies against the U.S. dollar, has fallen by more than 10% since the beginning of 2022. This decline has been driven by a combination of factors, including the Fed's aggressive interest rate hikes, proposed U.S. tariffs, and geopolitical conflicts.



The Fed's monetary policy shift, particularly its interest rate hikes, has significantly impacted the depreciation of Asian currencies against the U.S. dollar. Between 2021 and the first half of 2022, global non-U.S. currencies generally depreciated due to the Fed's policy changes and other factors. Among Asian currencies, 18 depreciated by less than 10%, and 10 depreciated by more than 10%, with some even exceeding 20% (Guan Tao, 2022).

Proposed U.S. tariffs under the Trump administration, including a 60% tariff rate on all imports from China and a 10-20% tariff rate on imports from all other countries, would likely result in weaker Asian currencies relative to the base case (Guan Tao, 2022). These policies would slow Asia's growth due to weaker export volumes and the negative spillovers from China's slowdown. Additionally, the Fed would likely cut at a slower pace initially due to stickier inflation, further impacting Asian currencies.

Geopolitical conflicts, such as the conflict between Russia and Ukraine, have also affected Asian currencies. For instance, the Russian suspension of gas supplies to Europe in August 2022 led to a depreciation of Asian currencies against the U.S. dollar (Bloomberg, 2022). This was due to safe haven demand for the U.S. dollar, triggered by the aggressive posture of Russia in suspending gas supplies to Europe.

The economic fundamentals of Asian countries, such as growth differentials and yield differentials, have also contributed to the depreciation of their currencies. The weaker economic growth of many Asian countries compared to the U.S. has led to a lack of synchronization in monetary policies between Asian countries and the U.S. (Guan Tao, 2022). Additionally, the interest rate differentials between the U.S. and Asian countries have contributed to capital outflows from Asia to the U.S., putting downward pressure on Asian currencies.

In conclusion, the Asian Currency Index has fallen to a two-decade low due to a combination of factors, including the Fed's aggressive interest rate hikes, proposed U.S. tariffs, and geopolitical conflicts. The weaker economic fundamentals of Asian countries, such as growth differentials and yield differentials, have also contributed to the depreciation of their currencies. As the global economy continues to face challenges, investors should closely monitor the movement of Asian currencies and the Asian Currency Index.