THE US dollar is having a soft day, as fears over the much-dreaded Chinese tariffs take a backseat for now, with US President Donald Trump wrapping up his first day in office with no explicit orders to levy previously threatened import duties.
Ahead of Trump’s inauguration, the US dollar index – which measures the greenback’s value against a basket of six major currencies: the euro, yen, pound, Canadian dollar, krona and franc – sank some 1 per cent to about 108.3 on Tuesday (Jan 21) noon.
In turn, major South-east Asian currencies ticked higher.
The rupiah strengthened as much as 1.1 per cent to about 16,219 per USD before midnight Singapore time on Monday, from 16,400 the same evening, before settling at 16,328 to the dollar on Tuesday noon.
The Philippine peso gained some 0.9 per cent to a high of about 58 per USD before Monday midnight, from around 58.5 in the day. As at Tuesday noon, it had fallen back to about 58.4.
The ringgit grew some 0.8 per cent to a high of about 4.45 per USD on Tuesday morning from 4.49 before Monday midnight. As at Tuesday noon, it has weakened slightly to 4.47.
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The baht gained some 0.7 per cent to 34 per USD on Tuesday noon from about 34.3 to the dollar on Monday evening.
Short-lived pardon
Foreign exchange (FX) strategists The Business Times spoke with explained that markets had already priced in expectations of aggressive trade policies leading up to Trump’s inauguration.
Abrdn’s head of Asian sovereign debt Kenneth Akintewe said: “The USD had already moved significantly into the event (so we are) likely seeing some position covering; it doesn’t necessarily have any bearing on the medium term.”
Jonathan Koh, economist and FX analyst for Asia at Standard Chartered Bank, said: “In FX, reaction is also a function of positioning, and the market was relatively long USD going into Trump’s inauguration as there was likely some expectation that Trump may be rolling out tariffs on day one.”
Therefore, the market may be seeing it as a temporary reprieve, echoed Koh.
MUFG Bank’s senior currency analyst Lloyd Chan concurred that the greenback’s latest decline is expected to be contained as some form of tariff hikes are likely still in the pipeline.
Global trade uncertainties will remain a drag on Asean currencies, he said.
Brace for impact
Across the board, pundits warned of currency volatility to come.
“It’s difficult to say how long the greenback will stay in reprieve, particularly given that there can be a gap between what Trump says and what is ultimately implemented,” said Katrina Ell, director, head of Asia-Pacific economics at Moody’s Analytics.
Expect ongoing currency volatility as markets digest further clues on how Trump’s presidency will unfold, she cautioned, noting that his ultimate agenda and priorities remain highly speculated.
In particular, currencies that are sensitive to the USD’s movements are likely to underperform, said StanChart’s Koh.
“Assuming the Trump trade as the pre-dominant theme… we are cautious on Asean currencies that are more trade-reliant and economically linked with China,” he noted.
Coupled with potential volatility arising from uncertainty on the timing of policies that may be USD-supportive, he believes the baht and won may underperform, followed by the Singapore dollar and ringgit.
Rate movements
Broadly across South-east Asia, central banks are expected to continue their easing cycles – although pundits said there is a high degree of uncertainty surrounding the timing of the rate cuts.
Several regional central banks began easing monetary policy towards the end of 2024, moving in lockstep with the US Federal Reserve – which cut rates for the first time, and by a significant half percentage point, in more than four years last September.
Recall that Thailand made its first cut in more than four years in October, while the Philippines dished out three consecutive reductions in August, October and December. Indonesia doled out one quarter-point cut each in September and, most recently, January.
Moody’s Ell raised Bank Indonesia (BI) as an interesting case.
“Typically, during bouts of currency weakness, BI is clear on prioritising rupiah stability with monetary policy and other interventions,” she said. “However, in January, BI felt sufficiently comfortable prioritising the domestic economy by delivering a surprise rate cut.”
Ell noted: “Further easing in the first half of the year is expected from Indonesia.”
Specific to Singapore, MUFG Bank’s Chan believes its central bank to adopt a wait-and-see stance, delaying a potential policy easing move till later this year, given that there has been no specific mention of US tariffs on China thus far.
“We still look for the Monetary Authority of Singapore (MAS) to ease its S$NEER policy as early as this month, given the deceleration in Singapore’s core inflation to below the 2 per cent level,” he said.
The S$NEER refers to the Singapore dollar’s nominal effective exchange rate, which is used by MAS as its main monetary policy tool instead of interest rates.
StanChart’s Koh concluded: “For the region in general, we expect policy rates to remain higher than pre-Covid levels amid a shallower Fed rate cut cycle.”
