Regional Asian currencies strengthened on Friday as easing geopolitical tensions in the Middle East lifted risk sentiment and pressured the US dollar, according to Lloyd Chan, senior currency analyst at MUFG.
Chan said the improved mood follows recent diplomatic signals hinting at a possible resolution to the region’s latest conflicts, prompting markets to price in a faster path toward stability and driving a rebound in Asian currencies.
US yields still support dollar carry trades
Despite the weaker dollar, Chan underlined that high US front-end yields continue to provide solid support for the currency.
The US two-year Treasury yield remains above the effective federal funds rate and has been holding near 3.78%. Chan noted this spread keeps short-term US rates attractive for dollar carry trades, even as risk appetite improves.
He added that this yield backdrop creates a challenging environment for those allocating capital into assets that do not offer competing returns, since the opportunity cost of moving away from dollar-denominated instruments remains elevated.
Gains in Asian currencies seen as fragile
Chan cautioned that the recent strength in regional currencies may prove temporary.
While easing geopolitical tensions have helped Asia’s foreign exchange markets, the durability of these gains depends on continued diplomatic progress. Without more concrete movement in negotiations, he warned that the recent uptick could quickly reverse, leaving regional currencies vulnerable in the face of still-elevated energy prices.
Energy remains a key risk
West Texas Intermediate crude has retreated from recent highs on improved geopolitical calm, offering some relief to Asia’s net energy importers.
However, Chan stressed that oil remains a point of concern. Any renewed escalation in the Middle East could push prices higher again, erasing recent currency gains and reintroducing inflationary pressures across several economies in the region.
Tech cycle underpins Asia’s currencies
Beyond geopolitics, Chan pointed to robust technology sector data as a more durable source of support for some Asian currencies.
Recent figures from China show strong growth in high-tech manufacturing output, aligning with Taiwan’s March export report, which recorded a 61.8% year-on-year surge led by semiconductor and electronics shipments.
Data released by the Korea Customs Service showed South Korea’s semiconductor exports jumped 149.8% in March from a year earlier, reaching a record high.
Chan said this performance reinforces the view that Asia’s technology cycle remains intact, providing support for technology-linked currencies such as the Taiwan dollar, South Korean won, Singapore dollar and Malaysian ringgit.
AI demand drives localized resilience
The strength in high-tech trade is being driven largely by global investment in artificial intelligence and advanced computing, Chan noted.
He said this powerful, sector-specific demand suggests that currencies of economies deeply integrated into the semiconductor supply chain may show relative resilience, even if broader risk sentiment turns weaker again.
Balancing risk-on sentiment with US yield appeal
Chan described the current market backdrop as a delicate balance: reduced geopolitical anxiety has temporarily curbed the dollar’s appeal and opened a window of opportunity for regional currencies, yet elevated US front-end yields continue to anchor demand for the greenback.
Traders, he said, must weigh the benefits of a risk-on environment against the steady pull of higher yields in US markets, with short-term rate differentials still favoring the dollar despite recent improvements in global sentiment.
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