At the start of the Year of the Fire Horse, we argued that Asian currencies were approaching a potentially important turning point. Stronger trade balances and evolving capital-allocation patterns had the potential to challenge several years of US dollar dominance. We also highlighted that, in a year characterised by the “Double Fire” element, any ascent was likely to be accompanied by heightened volatility and significant market swings.

Six months on, a clear and sustained appreciation trend in Asian currencies has yet to emerge. What has been more evident, however, is the volatility. Following a relatively constructive start to the year, the outbreak of conflict between the United States and Iran at the end of February introduced a very different market backdrop.

The resulting surge in oil prices, and its implications for Asia’s inflation outlook and external balances, complicated the outlook for local currency bonds and dampened investor sentiment toward regional assets. These concerns weighed particularly heavily on Asian currencies, given the region’s dependence on imported energy. As a result, Asian currencies broadly underperformed their emerging market peers, particularly those in Latin America, where many economies benefited from their status as commodity exporters.











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