Asian Currencies Under Pressure Again: The Middle East and the Yen in Focus

Friday Morning: Asia Holds Its Breath

Friday began across Asian currency markets with a sense of uneasy calm. Most regional currencies remained confined to narrow trading ranges, seemingly waiting for developments unfolding thousands of kilometres away. The Middle East once again became the main source of market-moving news, and its influence outweighed even the much-anticipated weakening of the US dollar.

The US Dollar Index, which fell to one-month lows this week following softer inflation data, edged up by 0.1% to 100.79 on Friday morning. The move may appear insignificant, but it was enough to encourage caution among Asian currencies. The dollar continues to benefit from its safe-haven status, and whenever geopolitical tensions intensify, investors begin turning back toward the US currency despite its fundamental weaknesses.

The situation in the Middle East is indeed becoming increasingly tense. The United States and Iran continue to exchange strikes, while yesterday’s reports of renewed military action confirmed that neither side appears ready to de-escalate the conflict. Oil prices remain close to one-month highs, automatically triggering a chain of rising inflation expectations. More expensive oil means higher energy costs, higher consumer prices and, ultimately, tighter monetary policy. For Asian economies, most of which are net energy importers, this represents a double blow.

The Yen: Near a 40-Year Low and Hoping for a Miracle

The Japanese yen remains the central currency drama of the year. The USDJPY ... pair is once again trading near 162.4, only a few tenths below the 40-year low of 162.84 reached earlier this month. The yen has not been this weak since the Japanese economy was operating under entirely different conditions.

The reasons behind the decline are well known and no longer surprise market participants. The enormous interest-rate gap between the United States and Japan continues to work against the yen. While the Federal Reserve keeps rates elevated and the Bank of Japan only cautiously hints at possible tightening, the dollar remains significantly more attractive to carry traders.

These traders borrow yen at low interest rates, invest the funds in higher-yielding dollar-denominated assets and earn the difference. This flow of capital places constant pressure on the yen, and only a meaningful change in monetary policy is likely to stop it.

However, with such a shift yet to occur, the Japanese authorities have been forced to rely on other measures. Finance Minister Satsuki Katayama once again confirmed that the government was prepared to respond to excessive exchange-rate movements. Markets, however, have heard similar statements many times, and their impact is becoming progressively weaker.

Japan has already spent a record ¥11.73 trillion on currency interventions between late April and late May, but these operations only temporarily slowed the yen’s decline. Once the interventions ended, selling pressure returned with renewed intensity.

Notably, the phrase indicating readiness to take “decisive measures” has disappeared from recent official statements. It previously served as a standard conclusion to almost every comment concerning the yen’s exchange rate, but it is now absent. Markets interpreted this as a signal that Tokyo may not be prepared to conduct another large-scale intervention, at least in the immediate future.

Katayama also called on major institutional investors, including the enormous Government Pension Investment Fund, to increase their holdings of domestic assets. In theory, this could support the yen because investors purchasing Japanese securities would need to sell foreign currencies and buy yen.

In practice, however, investors remain sceptical that portfolio adjustments alone can reverse the yen’s depreciation. Unless the interest-rate gap narrows, any alternative measures are likely to provide only temporary relief.

The Chinese Yuan: Stability Against the Odds

The Chinese yuan has performed relatively well this week. The USDCNY ... and USDCNH ... pairs edged higher on Friday, but the movement represented only a modest correction after the yuan reached one-month highs. Moreover, the Chinese currency is on track to record its third consecutive weekly gain, which is a notable achievement under the current conditions.

Markets largely ignored new accusations from US President Donald Trump that China had interfered in US elections. Such statements have become a familiar part of the political background, and investors have learned to distinguish political rhetoric from economic realities.

The main focus for the yuan is now the upcoming decision by the People’s Bank of China on its benchmark loan prime rates, which is expected to be announced next week.

China’s economy continues to send mixed signals. Second-quarter growth was weaker than expected, but the authorities have already begun introducing support measures. Should the PBOC decide to cut interest rates, the move could place additional pressure on the yuan. If rates remain unchanged, it will be interpreted as a signal of stability. For now, markets are waiting.

South Korea: A Public Holiday Does Not Stop Currency Trading

The South Korean won weakened slightly, with the USDKRW ... pair rising by approximately 0.1%. This occurred despite South Korean financial markets being closed on Friday because of a public holiday.

The won continues to trade in the offshore market, and there is an important detail behind this activity: since last month, South Korea has permitted round-the-clock trading in the currency, allowing investors to value and trade the won even when the domestic market is closed.

Although this development has attracted little attention from the general public, it represents a significant step in the evolution of South Korea’s foreign-exchange market. It makes the won more accessible to international investors and improves its liquidity. In the short term, however, it may also increase volatility, particularly during periods of geopolitical tension.

The South Korean economy continues to face many of the same challenges affecting other Asian countries: dependence on exports, vulnerability to disruptions in global supply chains and pressure from a strong US dollar. Despite the Bank of Korea’s recent interest-rate increase, the won remains under pressure.

Southeast Asia: The Singapore Dollar and Malaysian Ringgit

The Singapore dollar was virtually unchanged. This followed reports from the city-state’s authorities showing a narrowing trade surplus and slower growth in non-oil domestic exports.

These figures are particularly important for Singapore because its economy is heavily dependent on international trade. Slower export growth signals weakening global demand, which is inevitably a concern for investors.

The Malaysian ringgit weakened by approximately 0.3% following the release of inflation data. Malaysia’s annual inflation rate slowed to 1.9% in June, coming in below expectations.

On the one hand, this is positive for consumers because prices are increasing more slowly. On the other hand, it gives the country’s central bank greater flexibility to leave monetary policy unchanged without worrying about accelerating inflation.

For the currency, however, this may be a negative signal. Lower inflation reduces the need for monetary tightening, making the ringgit less attractive to international capital holders.

Australia and New Zealand: Commodity Currencies Under Pressure

The Australian dollar AUDUSD ... declined by approximately 0.2% against the US dollar. The fall reflects a broader deterioration in risk sentiment, as investors favour safer assets and commodity-linked currencies are usually among the first to suffer.

Australia is heavily dependent on commodity exports, and any slowdown in the global economy or deterioration in relations with China can negatively affect its economic outlook.

The New Zealand dollar edged lower but remains on course to record its third consecutive weekly gain. This is a relatively strong performance considering that other regional currencies have been losing ground.

Like Australia, New Zealand has a commodity-oriented economy. However, its currency can also benefit from domestic monetary-policy decisions, and the Reserve Bank of New Zealand’s recent interest-rate increase continues to provide support for the kiwi.

The Broader Picture: Geopolitics Versus Macroeconomics

Looking at the situation as a whole, it is clear that Asian currencies are currently trapped between conflicting signals.

On the one hand, US macroeconomic conditions are becoming more favourable for them. Softer inflation reduces the likelihood of further monetary tightening by the Federal Reserve, which should weaken the dollar.

On the other hand, geopolitical risks are pushing the dollar higher because of its safe-haven status, while simultaneously driving up oil prices and creating renewed inflationary risks.

This presents Asian central banks with a difficult dilemma. Cutting interest rates to support economic growth is risky because it could lead to further currency depreciation and higher imported inflation. Raising rates is also problematic because it could suppress already fragile economic growth.

Many regulators are therefore adopting a wait-and-see approach, hoping that the situation will become clearer.

However, time is not working in their favour. The conflict in the Middle East shows no sign of easing, while oil prices continue to rise. Should this trend persist, inflation expectations could increase sharply again, forcing central banks to take action.

For now, Asian currencies continue to balance between opposing forces, searching for stability in an increasingly uncertain world.