Geopolitical Tensions and Asymmetric FX Dynamics in Asia: Navigating Safe Havens and Undervalued Opportunities

Geopolitical tensions in Asia from 2023 to 2025 have reshaped currency markets, creating stark divergences in exchange rate behavior. As China resumes military drills around Taiwan and regional conflicts escalate, investors have increasingly favored safe-haven assets while undervalued currencies in politically stable economies present compelling opportunities. This analysis explores the asymmetric impacts of geopolitical risks on Asian currencies, identifies safe-haven alternatives beyond the U.S. dollar and Japanese yen, and highlights undervalued regional plays poised for growth.

Safe-Haven Currencies: Beyond JPY and USD

While the U.S. dollar and Japanese yen remain traditional safe-haven assets, their dominance has faced challenges. The yen, once a reliable refuge, has weakened significantly due to Japan's ultra-low interest rates and expansive fiscal policies, undermining its appeal. Conversely, the Swiss franc (CHF) has emerged as a top-performing safe-haven currency in the G10 group, bolstered by optimism over a potential U.S.-Switzerland trade agreement and its reputation for stability.

The U.S. dollar, though still a global safe haven, has shown vulnerability amid domestic uncertainties, including government shutdown risks. Meanwhile, geopolitical shocks-such as the Israel-Iran conflict-have amplified risk aversion, driving capital toward the dollar and gold. However, the Dollar Index Spot has dropped nearly 9% year-to-date in 2025, prompting investors to diversify into alternative safe havens like Bitcoin and gold.

Asymmetric Impacts on Asian Currencies

Geopolitical tensions have produced asymmetric effects across Asian foreign exchange markets. Countries deeply integrated into global value chains, such as China, Vietnam, and the Philippines, have experienced sharper currency depreciation following geopolitical shocks. For instance, Vietnam's export-dependent economy has suffered from negative geopolitical events, underscoring the need for tailored policy responses.

Conversely, currencies in politically stable or resource-rich economies have appreciated. South Africa's rand (ZAR), Australia's dollar (AUD), and Iceland's krona (ISK) have benefited from reduced geopolitical risk perceptions and strong commodity demand. This divergence highlights the importance of macroeconomic fundamentals and geopolitical positioning in shaping currency trajectories.

Undervalued Regional Plays: Growth Potential Amid Uncertainty

Several Asian currencies remain undervalued and offer attractive entry points for investors. The Chinese yuan (CNY) is estimated to be undervalued by 18% to 30% based on current account surpluses and exchange rate trends, supported by a strong trade surplus. Despite the Chinese central bank's tight exchange rate management, the yuan is well-positioned to appreciate as the U.S. dollar weakens and trade advantages persist.

The South Korean won (KRW) and Indian rupee (INR) also show promise. The won benefits from robust external balances and foreign investor inflows, while the rupee is supported by a widening trade surplus and growing supply chain diversification. Additionally, the Taiwanese dollar (TWD) and Singapore dollar (SGD) have outperformed in 2025, driven by resilience against U.S. tariffs and strong inflows into equity and bond markets.

However, not all Asian currencies are equally attractive. The Indonesian rupiah (IDR) and Philippine peso (PHP) face headwinds from narrowing real rate spreads and fiscal concerns, limiting their upside potential. Investors must weigh these risks against the growth prospects of more stable economies.

Strategic Implications for Investors

The evolving geopolitical landscape demands a nuanced approach to currency allocation. Safe-haven assets like the Swiss franc and gold provide insurance against volatility, while undervalued currencies in politically stable economies offer long-term appreciation potential. For example, the yuan's undervaluation and China's trade surplus position it as a strategic play, whereas the KRW and INR align with structural trends in global supply chains.

Investors should also monitor trade tensions between the U.S. and Asia, as high tariffs could force economies like Vietnam to pivot toward domestic consumption. Diversifying across safe-haven and undervalued currencies-while hedging against geopolitical shocks-can help balance risk and reward in an increasingly fragmented market.

Conclusion

Geopolitical tensions in Asia have created a landscape of both risk and opportunity. While safe-haven currencies like the Swiss franc and gold offer refuge, undervalued regional plays such as the yuan, won, and rupee present compelling growth prospects. By leveraging macroeconomic fundamentals and geopolitical positioning, investors can navigate the asymmetric impacts of uncertainty and capitalize on emerging opportunities in 2026 and beyond.