Asian Currency Rally: Trade Deal Speculation Drives Dollar Weakness
Asian currencies are experiencing significant appreciation against the US dollar as traders bet on bilateral trade agreements that may require limited currency intervention.
The Korean won, Japanese yen and Taiwan dollar have rallied strongly, with the New Taiwan Dollar surging 3.3% on May 2, marking the largest single-day gain in 23 years and achieving a 6.49% appreciation since early April. The Korean won gained 19.5 won from the previous trading session, crossing below 1,400 won for the first time in five months. This currency strength stems from expectations that exchange rates will be part of negotiations with the Trump administration, as the US seeks to reduce trade deficits through bilateral deals rather than multilateral accords.
Market participants anticipate that any FX deal would commit to freely floating exchange rates and limiting FX intervention, particularly intervention to weaken local currencies. The rally reflects front-running behavior ahead of formal negotiations, with $7 trillion in Asian reserves providing negotiating leverage.
Forecast Scenarios (GCHQ)
Likely (55-75%): Gradual Currency Appreciation with Bilateral Deals
Asian currencies will continue appreciating gradually over the next 6-9 months as bilateral trade agreements are finalized with specific currency provisions. The Trump administration will secure commitments from major Asian economies to limit intervention and allow market-determined exchange rates, similar to the framework already established with preliminary discussions in South Korea and Taiwan. Currency appreciation will stabilize around 10-15% from April levels, providing sufficient adjustment to reduce US trade deficits while avoiding economic disruption. This scenario assumes successful negotiation of trade deals that balance American demands for currency flexibility with Asian concerns about export competitiveness.
Realistic Possibility (45-55%): Volatile Currency Overshooting
Market speculation and front-running behavior will drive Asian currencies significantly beyond fundamental values, creating unsustainable appreciation that forces policy intervention within 3-6 months. Taiwan's dollar could test the speculated 1:13.3 exchange rate against the USD, while other regional currencies follow similar extreme trajectories. Economic pressures from reduced export competitiveness will eventually force Asian central banks to intervene despite trade deal commitments, creating diplomatic tensions with the US and potentially undermining negotiated agreements. This scenario reflects the difficulty of managing market expectations during uncertain trade negotiations.
Unlikely (30-45%): Currency War and Trade Deal Collapse
Excessive currency appreciation will trigger coordinated Asian central bank intervention to protect export industries, leading to accusations of currency manipulation from the Trump administration and collapse of bilateral trade negotiations. The US will respond by implementing threatened 50% reciprocal tariffs on countries that resume currency intervention, sparking retaliatory measures and a broader trade war. Asian economies will accelerate diversification away from US markets and the dollar-based financial system, potentially creating alternative trading blocs centered on China. This scenario assumes that economic pressure from currency appreciation overwhelms political commitments to trade deal negotiations.
