MUFG’s Senior Currency Analyst Lloyd Chan notes that improved diplomatic signals in the Middle East have boosted risk sentiment, softening the US Dollar (USD) and supporting Asian FX. However, high US front-end yields still underpin the Dollar, and bond markets remain cautious. Chan highlights that Asian currencies have rebounded on expectations of a quicker resolution, but warns recent gains could prove vulnerable if diplomacy stalls.

De-escalation narrative lifts Asia FX

"FX-wise, the USD has also softened on improved risk appetite, but still-high US front end rates are keeping a supportive carry backdrop for the dollar, with the US 2-year yield remaining above the effective Fed funds rate (albeit easing). It appears that bond markets are still signalling some caution about the de-escalation narrative."

"Meanwhile, Asian FX has also rebounded as markets price for a quicker resolution. If there is indeed a quick or credible path to resolution, recent optimism could persist, feeding into our medium-term view of eventual dollar weakness. However, if diplomacy fails and optimism fades, USD could stay supported for longer, while recent Asian FX gains look more vulnerable, amid still high energy prices."

"Encouragingly, China’s strong high-tech output growth corroborates Taiwan’s March export data, which showed a sharp 61.8%yoy rise, driven largely by semiconductors and electronics. This reinforces our view that the regional tech upcycle remains intact. Against this backdrop, tech -oriented currencies such as TWD, KRW, SGD, and MYR should continue to benefit."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)