Asian Markets Surge 3% on U.S. Dollar Drop

Asian markets surged to a three-year high on Friday, driven by a significant drop in the U.S. dollar to multi-year lows. The weakening of the U.S. dollar boosted Asian currencies and asset demand, leading to a rally in equities across the region. The MSCI’s index of Asia-Pacific shares outside Japan reached its strongest point since November 2021, closing 0.2% higher and was on track for a 3% gain over the week. Japan’s Nikkei jumped 1.5%, briefly topping 40,000 for the first time since January. Similarly, stock markets in Shanghai, Sydney, and Singapore also experienced substantial gains.

The optimism in Asian markets mirrored the positive sentiment on Wall Street, where all three main indexes rallied. The Nasdaq hit a record high, and the S&P 500 approached a new closing peak. This bullish trend in the U.S. markets was fueled by easing concerns about Middle East tensions and renewed trade hopes. The Israel-Iran ceasefire allowed investors to refocus on economic indicators and trade negotiations, particularly as the deadline for countries to strike deals with the U.S. approaches.

The prospect of lower borrowing costs in the U.S. sent the Dollar Index to its lowest level since March 2022. Although the dollar edged slightly higher on Friday, it remained under pressure. The Federal Reserve's dovish stance, hinted at by Chairman Jerome Powell and other officials, contributed to the expectation of rate cuts. This dovish turn was further supported by data showing the U.S. economy contracted more than previously estimated in the first quarter and consumer spending grew less than expected.

Trade war worries were also slightly soothed after the White House indicated that the deadline for agreeing deals to avert tariffs could be extended. This flexibility provided some relief to markets, as the administration signaled progress on trade with China. The two countries had reached an understanding to slash tit-for-tat tariffs and address key issues, including China’s export of rare earths and restrictions on its access to tech goods.

The rally in Asian markets was also driven by strong corporate earnings. For instance, Chinese smartphone maker Xiaomi soared to a record high in China Hong Kong as it enjoyed strong early orders for its latest sports utility vehicle, marking its second foray into the competitive electric vehicle market. This positive corporate news further boosted investor confidence in the region.

The overall sentiment in Asian markets was upbeat, with investors turning their attention back to economic fundamentals and trade negotiations. The weakening U.S. dollar and the prospect of lower interest rates in the U.S. provided a favorable environment for Asian equities, leading to a significant rally across the region. The dollar fell to a three-and-a-half-year low on Friday and was headed for a 1.4% weekly drop, its biggest in over a month. Year to date, it has lost more than 10%. If this holds through the end of the week, it would mark its biggest first-half fall since free-floating exchange rates began in the early 1970s.