Asia's FX Crossroads: Tariffs, Trump, and the Fed's Shadow

Asia’s foreign exchange markets remain underpinned by evolving dynamics as the market anticipates U.S. Federal Reserve rate cuts and grapples with the impact of U.S. tariff policies. The recent downward revision of U.S. payrolls data—cutting the average monthly job growth to approximately 149,000 from earlier estimates—has reinforced expectations of a softer U.S. labor market, which in turn strengthens the case for aggressive rate cuts by the FOMC. Analysts suggest the central bank may cut rates by at least 25 basis points by the September meeting. This dovish expectation has contributed to a mixed market reaction, with U.S. bonds experiencing a selloff and the dollar showing marginal gains amid rising geopolitical tensions.

Geopolitical developments have also influenced risk sentiment and oil prices, complicating the broader economic outlook. A recent Israeli strike on a senior Hamas leader in Doha, condemned by Qatar and criticized by former U.S. President Donald Trump, has raised concerns about regional instability and its spillover effects on global markets. In parallel, Trump reportedly signaled to European officials a willingness to impose additional tariffs on India and China if EU nations reciprocated, as part of broader efforts to pressure Russia into diplomatic negotiations. While India is already facing 50% tariffs from the U.S. on its crude oil imports, the prospect of further trade measures could add to uncertainty, particularly as India negotiates a free trade agreement with the EU.

Meanwhile, Asian export data for August revealed a mixed picture. China’s exports to the U.S. continued to decline, though growth to other markets, including other Asian countries, helped mitigate some of the losses. In contrast, exports from China Taiwan to the U.S. increased further, benefiting from exemptions in the current tariff regime for semiconductors and electronics. Analysts caution, however, that this trend may not be sustainable due to the limited duration of tariff exemptions and potential policy shifts. Vietnam’s exports also saw a slowdown in August, with year-on-year growth falling to 14%, though the absolute volume remains high.

CNY strength has been driven by both portfolio flows and geopolitical developments, including growing ties with North Korea and India, which have bolstered market sentiment. The People’s Bank of China’s USD/CNY fixing has largely aligned with market expectations, reflecting a balance between policy stability and external pressures. Looking ahead, key economic data from Asia—including China’s trade, credit, and inflation figures—will be closely watched, with expectations of weaker exports and subdued loan demand amid ongoing tariff pressures. India’s upcoming CPI data will also be pivotal for the Reserve Bank of India’s monetary policy trajectory, with further easing likely if inflation remains muted.

Analysts maintain a cautious outlook on Asian currencies, forecasting underperformance against core G10 currencies such as the euro. This view is underpinned by the anticipated decline in exports due to U.S. tariffs and the broader shift in global trade patterns. The U.S. August CPI data will be a crucial near-term indicator for the pace of inflationary pass-through from tariffs, with potential implications for Fed policy expectations.