BY Heng Koon How
The inflationary bias of Trump’s policies may cause concern, but a strong US dollar is not necessarily a bad thing for Southeast Asian currencies, says UOB’s Heng Koon How.
Southeast Asia has thus far remained a safe haven amid the uncertainties in the United States and China – but in 2025, regional currencies could be looking at a year of weakness.
Donald Trump’s second presidency in the United States will have a significant impact on currencies worldwide. He has expressed his desire for a weaker US dollar, but ironically, his policies will likely lead to a stronger greenback instead and contribute to weakness in the Chinese yuan in 2025.
This is because his policies are expected to be inflationary, which would force the Federal Reserve to adopt a shallower rate cut trajectory. Relatively higher US rates will in turn boost the US dollar.
Since Trump won the election last November, the US dollar has extended its rally. The US Dollar Index (DXY) made a very substantial gain of about 8 per cent in the final quarter of 2024, from around 100 in early October to the current level of about 108.
Across the same time frame, the greenback has also strengthened substantially against the Singapore dollar, from 1.28 to 1.36.
US DOLLAR STRENGTH
There are several inter-related drivers that can explain the US dollar’s strength since Trump’s election win.
From a policy point of view, the incoming Trump 2.0 administration is likely to extend tax cuts further and intensify trade tariffs against China and potentially other countries such as Canada and Mexico. This will increase the cost of goods and services for the US.
Our analysis suggests that a staggered and phased rise of American tariffs will likely contribute to a moderate rise of 0.3 percentage point in the US consumer price index (CPI) in 2025. However, in a more pessimistic scenario of an immediate jump in tariffs upon Trump’s inauguration on Jan 20, there will be a jump of at least 0.5 percentage point in the US CPI.
In short, Trump’s policies may well reignite inflation for the US.
In fact, the latest data showed that the CPI has stayed firm at 2.7 per cent year-on-year in November, raising risks that the United States’ progress on its path towards the Fed’s long-term target of 2 per cent inflation may have stalled.
Consequently, renewed inflationary risks implies lower odds of Fed rate cuts for 2025. At the latest Federal Open Market Committee meeting on Dec 18, the Fed indeed signalled a shallower rate cut trajectory.
The Fed’s updated projection now implies only two rate cuts for 2025, fewer than the previous projection of four cuts. Fed chair Jerome Powell also sounded less committal about further rate cuts going forward, warning that “the slower pace of projected cuts … reflects the higher inflation expectations”.
The renewed inflationary risk, coupled with shallower Fed rate cuts and higher long-term yields, all contribute to the strong US dollar we’re now seeing.
This strength will likely continue, with the DXY rising further above 110 by the middle of 2025 and the 10-year US Treasury yield staying firm above 4 per cent.
YUAN SET TO WEAKEN
As for China, the economic outlook remains highly uncertain for 2025. Despite the huge dose of stimulus from September, the debt restructuring process in China’s property sector remains challenging as domestic retail consumption has yet to pick up meaningfully.
The deflationary environment in China remains with its money supply continuing to contract, driving long-term China Government Bond yields decidedly below 2 per cent.
In light of the incoming trade tariffs in 2025 against China, economists are more pessimistic about the country’s economic growth. We have downgraded China’s gross domestic product (GDP) forecast for the year by 0.3 percentage point to 4.3 per cent.
Acknowledging the difficulties plaguing China’s economy, authorities have suggested that China now needs to pursue “moderately easy” monetary policy to support the economy.
As such, we expect the Chinese yuan to weaken further against the USD, from 7.3 currently to 7.6 by the third quarter of 2025.
TRADE SLOWDOWN COULD WEAKEN ASEAN CURRENCIES
In 2025, economies in the Association of Southeast Asian Nations (ASEAN) will find themselves caught in between the incoming tariffs from the US and China’s ongoing economic slowdown.
Under the first Trump administration, tariffs were first imposed against China at the start of 2018 and ASEAN exports contracted in tandem across the next two years. Given the significance of trade to our region, the contraction in exports resulted in ASEAN currency weakness.
History is likely to repeat itself in 2025. As such, we expect further weakness in ASEAN regional currencies including the Malaysian ringgit, Thai baht, Indonesian rupiah, Vietnamese dong and Singapore dollar across 2025.
Pessimists would argue that should the yuan weaken further towards the critical 8.0 level against the USD, it might trigger a disruptive round of competitive currency devaluation across ASEAN. While this tail risk cannot be ruled out, there are several positives we can count on for our region.
These positives include strong foreign direct investment inflows from the US and China into ASEAN, strong intra-regional trade, record levels of central bank reserves, strong domestic spending and robust regional tourism.
ASEAN currencies could still weaken in 2025 – but there is ample monetary and fiscal policy support to mitigate against any disruptive volatility and reinforce the safe-haven status of regional economies.
Overall, the global backdrop is that of a stronger US dollar, while the regional risk is for further weakening of the yuan. As such, the Singapore dollar together with ASEAN currencies are poised for weakness across 2025.
In light of the increased risk and volatility across foreign exchange markets in 2025, investors and corporates alike should hedge against further US dollar strength and limit borrowings in US dollars.
Heng Koon How is head of markets strategy at UOB.