(Bloomberg) — The outlook for emerging Asian currencies is worsening again after US President Donald Trump announced new tariffs on China, curbing optimism that his threats were mainly bargaining ploys.
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Regional currencies have tumbled over the past week, with the Thai baht and South Korean won both sliding about 2%, as rising fears over a global trade war sapped risk appetite. Asian currencies have also unwound part of their January rally as a number of central banks in the region cut interest rates to support growth.
There are “significant risks” to the outlook for Asia currencies, “especially if the US administration adopts a more aggressive tariff policy against Asia,” said Eric Lo, a fund manager for pan-Asian bonds at Manulife Investment Management in Hong Kong. “Additionally, we believe that the preference of Asian central banks to cut policy rates this year could limit the appreciation of Asian currencies.”
A Bloomberg index of emerging Asian currencies has dropped about 0.8% over the past week as Trump announced an additional 10% tax on Chinese imports, along with 25% tariffs on Mexico and Canada. That decline accelerated a retreat in the gauge from a two-month high set on Feb. 24
On Monday, Trump said he would plow ahead with the new levies on Canada and Mexico starting Tuesday and later the White House said he also signed an order on the China tariffs that will take effect shortly after midnight in Washington. The directive said Beijing had “not taken adequate steps” to address the flow of illicit fentanyl into the US.
The renewed tariff fears have added to range of headwinds facing Asian currencies. Central banks in South Korea and Thailand are among those that have recently cut rates to bolster growth, putting them at odds with their global peers in countries such as Brazil. Asian currencies have also been dragged lower as the dollar rallied amid an increase in demand for the greenback following Trump’s election victory.
“It’s hard to get excited about FX performance in the region,” said Rob Drijkoningen, co-head of the emerging markets debt team at Neuberger Berman Asset Management in The Hague. Among the negatives are the fact that yields are relatively low across the region, and also the US tariff pressures on China even though they are unlikely to rise as high as the original threat of 60%, he said.
