Asia FX: US yields lower offset crude risks – MUFG

MUFG analyst Lloyd Chan said the South Korean won and the Taiwan dollar are leading Asian FX, supported by softer US Treasury yields and a resilient tech cycle. This move offsets external pressures from elevated oil prices and improves regional market sentiment.

**Falling US Treasury yields provide support**

Recent pullbacks in US Treasury yields from highs have eased external depreciation pressure on Asian currencies. Earlier, the US 10-year Treasury yield had climbed to near 4.75%, pressuring emerging market currencies. As yields soften, momentum for capital flows back into Asian assets strengthens, offering a rebound window for export-oriented currencies such as the won and the Taiwan dollar. Market sentiment has thus recovered, especially against a backdrop of steady global tech demand.

**Resilient tech cycle benefits export currencies**

The outperformance of the won and the Taiwan dollar is closely tied to the resilience of the current tech cycle. Sustained demand in key sectors such as semiconductors supports export prospects for South Korea and Taiwan, in turn boosting their currencies. Analysts believe this structural factor offsets, in the near term, concerns over deteriorating terms of trade from higher energy prices, making these two currencies stand out among Asian peers. However, markets still need to watch oil price trends—if Brent crude remains persistently elevated, it could gradually erode current account surpluses of Asian importers.

**Dollar rebound risk still warrants caution**

Despite a temporary breather for Asian currencies, the dollar's trajectory remains uncertain. Earlier, the dollar spot index rebounded from a two-month low of 99.33, as energy shocks from heightened Middle East geopolitical tensions interrupted the dollar's decline. Should US inflation expectations reignite and force the Fed to maintain a hawkish stance, the dollar could strengthen again, limiting further upside for Asian currencies. Current market pricing shows roughly a 65% probability that the Fed holds rates steady in September.