Has the logic of Asian currency appreciation changed after the tariff talks?

Optimistic trade progress eases downward pressure on the dollar, Asian currencies briefly under pressure, but in the long run, Goldman Sachs believes the upward trend of Asian currencies against the dollar remains unchanged.

According to news from the Wind Trading Desk, Goldman Sachs stated in its latest report on Tuesday that due to better-than-expected results from trade negotiations, it has raised its 2025 U.S. GDP growth forecast, reduced the probability of recession, and delayed expectations for Federal Reserve interest rate cuts, which has eased the downward pressure of the dollar on Asian currencies.

However, the three core reasons for the appreciation of Asian currencies against the dollar remain: the dollar is still overvalued, the trend of Asian exporters continuing to exchange dollars for local currencies will persist, and if narrowing the trade surplus becomes the focus of trade negotiations, then Asian currencies may ultimately need to strengthen against the dollar.

Goldman Sachs stated that if a trade agreement is reached and exporters continue to sell dollars, the Korean won, New Taiwan dollar, Malaysian ringgit, and Singapore dollar will be the currencies that benefit the most.

Improvement in U.S. Economic Outlook Reduces Downside Risks for the Dollar

According to the Goldman Sachs report:

The results of the U.S.-China trade negotiations exceeded expectations, prompting Goldman Sachs economists to raise their forecast for U.S. GDP growth in the fourth quarter of 2025 from 0.5% to 1.0%, and to lower the probability of a U.S. economic recession from 45% to 35%.

Expectations for Federal Reserve interest rate cuts have also been delayed, with cuts now expected in December 2025, March 2026, and June 2026, instead of the previously anticipated July, September, and October 2025. More importantly, the reduction of left-tail risks in the U.S. economy may decrease the downside of the dollar relative to safe-haven currencies such as the yen.

As a result, the long positions in the dollar against Asian currencies that had been established in the market have undergone some adjustments. The report noted that the rise of the dollar against the Thai baht, Malaysian ringgit, and yen was most pronounced, especially the rise of the dollar against the yen reflected the market's unwinding of recession hedge positions.

Three Core Factors for Appreciation of Asian Currencies Remain Unchanged, Downward Pressure on the Dollar Persists

Although the short-term market reaction is significant, the Goldman Sachs report emphasizes that at least three key themes still exist:

1. The dollar is still overvalued

Goldman Sachs' indicators show that the dollar is still overvalued by about 17% compared to its DEER valuation model. Over the past five years, the theme of American exceptionalism has driven the dollar's excessive valuation, reflected in the substantial increase in foreign investors holding U.S. assets. Although Goldman Sachs' U.S. economic team has raised its GDP growth forecast for 2025, the 1.0% growth is still below the trend level of 1.75%.

2. The trend of Asian exporters continuing to exchange dollars for local currencies will persist

According to Goldman Sachs data, nominally, foreign currency deposits in Taiwan, South Korea, Indonesia, Malaysia, Thailand, and the Philippines have nearly doubled from $300 billion in 2015 to nearly $600 billion in February 2025. Over the past decade, the percentage of foreign currency deposits in Taiwan has been on the rise, and Malaysia, Thailand, and the Philippines have shown similar trends in the past 3-4 years. With the outlook for the dollar and interest rates declining, these exporters will increase their local currency exchange rates 3. The ability of Asian currencies to resist depreciation is stronger during trade negotiations

The report points out that most Asian economies have a trade surplus with the United States. If narrowing the trade surplus becomes the focus of trade negotiations, then Asian currencies may ultimately need to strengthen against the US dollar. Otherwise, further weakening of Asian currencies could lead to an even larger trade surplus with the United States, which is contrary to Trump's goals. Therefore, some Asian central banks may be more cautious in making large-scale purchases of US dollars during trade negotiations.

Goldman Sachs stated that if a trade agreement is reached and exporters continue to sell US dollars, the South Korean won, New Taiwan dollar, Malaysian ringgit, and Singapore dollar will be the currencies that benefit the most.