Since the 18 June FOMC meeting, the global market narrative has shifted in favour of a “high-for-longer” US rates environment, keeping Asia FX under pressure. Under new Fed Chair Kevin Warsh, the central bank has pivoted toward a more hawkish tone, signalling a stronger commitment to containing inflation. This policy shift is being reinforced by incoming data, with core PCE inflation still running above 3% and labour market conditions remaining resilient, pointing to continued macro strength. As such, market pricing for a potential Fed hike around October has remained intact. USD downside likely remains contained unless there is a clear dovish pivot by the Fed or a material deterioration of US macro data.
While US Treasury yields have eased slightly in recent sessions, this has done little to alter the broader rates backdrop. Both the US 2-year and 10-year yields remain above 4%. More importantly, real yields (adjusted for breakeven inflation rates) remain elevated, anchoring USD demand. From a strategy perspective, this suggests that even if nominal yields consolidate in the near term, the underlying support for the dollar remains intact.
Against this backdrop, most Asia FX have depreciated broadly since the FOMC, reflecting widening swap rate differentials and the persistence of a high-for-longer US rate environment. We maintain a defensive bias on selective Asia FX in the near term (see Selective ASEAN FX under pressure amid shifting US rate dynamics).
We have observed that THB, KRW, and PHP have led regional losses since the Fed meeting. The Thai baht remains particularly vulnerable as a low-yielding currency, while the Bank of Thailand continues to prioritize a growth-supportive monetary policy stance. Meanwhile, the Philippine peso, despite offering relatively higher yields, has not been sufficiently insulated from depreciation pressures given elevated US rates. That said, the scope for further weakness could be moderated should the BSP extend policy tightening, although this remains contingent on external factors, particularly the absence of another energy price shock.
In Indonesia, Bank Indonesia’s recent policy rate hikes and FX support measures have helped to reduce currency volatility, which in turn should slow the pace of rupiah depreciation. Additionally, the government’s plan to trim spending on the free school lunch programme, equivalent to roughly 0.2% of GDP or 15% of the 2026 budget, could provide modest fiscal support for the currency at the margin. In contrast, currencies such as INR and VND have traded more steadily.
