The Strategic Case for Asian Currency Exposure Amid Dovish Fed Signals and Geopolitical Easing

The U.S. dollar's long reign as the dominant reserve currency is showing cracks. After a decade of tightening, the Federal Reserve's November 2025 policy statement signaled a dovish pivot, cutting the federal funds rate by 25 basis points to a target range of 3.75–4.00%. This shift, driven by slowing job gains and persistent inflation, marks a critical inflection point for global currency markets. As the Fed projects further rate cuts in 2026-ranging from one (J.P. Morgan) to three (BNP Paribas) reductions-the dollar's relative strength is under pressure. Meanwhile, Asian central banks are navigating a divergent policy landscape, creating a compelling case for tactical exposure to currencies like the South Korean won (KRW), Malaysian ringgit (MYR), and Chinese yuan (CNY).

Policy Divergence: The Fed vs. Asia's Central Banks

The Fed's accommodative stance contrasts sharply with the cautious easing seen in Asia. The Bank of Korea (BOK) has maintained its policy rate at 2.50% in November 2025, prioritizing financial stability amid volatile exchange rates and housing market concerns. In China, the People's Bank of China (PBOC) kept its one-year and five-year Loan Prime Rates (LPR) steady at 3.0% and 3.5%, respectively, for the seventh consecutive month, despite weak economic data and property sector struggles. Malaysia's Bank Negara Malaysia (BNM) is gradually easing policy to support growth, aligning with broader APAC trends.

This divergence creates a tailwind for Asian currencies. With the Fed's rate at 3.75–4.00% and Asian rates ranging from 2.50% (KRW) to 3.5% (CNY), the narrowing rate differential reduces the dollar's appeal. BNP Paribas forecasts EUR/USD to weaken to 1.16 in the short term and 1.24 over 12 months, a trend that could extend to Asian currencies as capital flows reallocate.

Exchange Rate Trends: A Bullish Outlook for KRW, MYR, and CNY

The weakening dollar has already catalyzed favorable movements in Asian currencies. By Q3 2026, the KRW is projected to depreciate to 1,380 from 1,467.8 in late 2025, while the MYR is expected to stabilize at 4.060 against the USD. The CNY, though facing U.S. tariff pressures, is forecasted to strengthen to 6.950 by Q3 2026, reflecting China's pivot toward domestic industrial policy. These trends are underpinned by the Fed's dovish tone and Asia's relative resilience in managing inflation and growth.

The end of quantitative tightening and the Fed's focus on employment have eased liquidity conditions globally, further supporting Asian currencies. For investors, this creates a window to capitalize on undervalued positions in KRW, MYR, and CNY, particularly as Asian central banks continue to ease rates to counteract U.S. trade policies.

U.S.-China Trade Dynamics: A Double-Edged Sword

The U.S.-China trade relationship remains a wildcard. China faces an effective tariff rate of 38% on its exports to the U.S., including a 25% Section 301 tariff and a 10% reciprocal tariff. These barriers have accelerated supply-chain de-risking, with the U.S. imposing a 40% penalty on transshipment routes through Vietnam, Malaysia, and Thailand. While this disrupts traditional trade flows, it also incentivizes Asian economies to diversify their export strategies.

For example, India and Taiwan have leveraged their positions in technology and AI to offset U.S. trade pressures. China's domestic industrial policy, meanwhile, is reducing reliance on U.S. goods, creating a more self-sufficient economic model. These shifts suggest that Asian currencies may benefit from structural resilience, even as trade tensions persist.

Risks and Timing: Navigating Uncertainty

Despite the favorable backdrop, risks linger. The IMF has upgraded Asia's growth forecast but warned that rising interest rates could emerge if trade policy uncertainty or geopolitical tensions escalate. J.P. Morgan notes a 40% probability of a U.S. recession in the second half of 2025, which could delay Fed rate cuts and stabilize the dollar. Additionally, U.S. tariffs have already squeezed household purchasing power and depressed global business sentiment.

For tactical entry, investors must balance these risks with policy lags. Asian central banks have space to ease rates further, but their responses to U.S. trade policies will be critical. A prolonged trade truce could offer short-term stability, but underlying structural tensions remain unresolved. Volatility thresholds-such as the KRW's projected move to 1,380 or the CNY's 6.950 level-provide clear entry points, but patience is key.

Conclusion: A Strategic Window for Currency Exposure

The confluence of Fed dovishness, Asian policy divergence, and evolving trade dynamics creates a compelling case for Asian currency exposure. While the U.S. dollar's weakness and rate cuts in 2026 are likely to persist, investors must remain vigilant about geopolitical risks and timing. For those willing to navigate the volatility, KRW, MYR, and CNY offer attractive opportunities in a world where the dollar's dominance is increasingly contested.