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At the start of this week, Asian currencies have shown strength brought about by rising foreign reserves and financial derivatives.
This comes amid worries about domestic currencies’ positions compared to a strong dollar in the face of tariffs.
In China, foreign reserves rose by $40 billion in January thanks to increasing private and corporate foreign reserves purchases – likely connected to fears of a yuan depreciation. This was the biggest rise since April 2021, bolstered by both individuals and non-financial institutions.
In Indonesia and India, central banks are shoring up domestic currencies by shorting the dollar through derivatives, pointing to worries about the knock-on effects of tariffs against China on the region.
The Asian economic giants have been on edge ever since the first round of US tariffs was announced, fearing a drop in exports could harm domestic economies and devalue currencies. The US is the biggest single importer of Chinese goods; Trump’s wide-ranging tariff regime, including a 10% tariff on all goods and specific measures targeting shipments from low-cost Chinese retail giants, could significantly impact the foreign exchange rate in the next months.
The Chinese economy has been faltering in the last year, with frequent rate cuts by the Chinese central bank struggling to revive it. Amid low interest rates and fears of a recession, exacerbated by the potential effects of US tariffs, Chinese investors will be looking towards foreign currencies—especially the dollar—for higher yields and more security.
Elsewhere in Asia, central banks are using derivatives, like net dollar short forward positions, to protect their own currencies against a strengthening dollar. The Reserve Bank of India has recently increased its net dollar short forward position to an all time high, while the Indonesian central bank’s net short book reached a 10-year high this month.
Some see this as an attempt to temporarily strengthen currencies by making commitments that may be hard to keep in the future. However, it could also signal confidence from Asian banks that the current tensions between Asian giants and the US are only temporary and will not have a wide-ranging effect on the region.
Already, the limited nature of the tariffs that have been announced – a far cry from the 60% discussed during Trump’s campaign – could reassure investors. Growth in the Chinese tech sector, driven by the launch of the Chinese AI app DeepSeek, a low-cost alternative to ChatGPT, could also boost the economy.
These currency trends could have a knock-on effect on the type and magnitude of tariffs the Trump administration sets on Asian exporters. Trump has accused China of currency manipulation as far back as 2018, and US Treasury Secretary Scott Bessent has recently announced an investigation into currency manipulation as a way to lower the impact of tariffs, expected to produce results by 1 April.
