Goldman Sachs: There is still room for appreciation of Asian currencies in the second half of the year, especially optimistic about the Korean won and the New Taiwan dollar

Against the backdrop of the continued depreciation of the US dollar, Asian currencies may continue their current appreciation trend in the second half of 2025.

According to information from the Chase Wind Trading Desk, Goldman Sachs stated in a report on June 30 that the forces supporting the US dollar's sustained strength over the past decade are changing. It is expected that the marginal funds flowing into US assets will decrease, and a gradual rotation towards non-US assets will continue to pressure the dollar in the second half of 2025.

The continued decline of the dollar will drive Asian currencies higher. So far this year, Asian currencies have generally strengthened, with the New Taiwan Dollar, South Korean Won, Singapore Dollar, and Malaysian Ringgit appreciating against the US dollar by about 5-10%. This trend is expected to continue into the summer, with the South Korean Won being the most favored, while the Indian Rupee may lag relatively.

Weak Dollar Creates Space for Asian Currency Appreciation

Goldman Sachs maintains a bearish stance on the dollar. The bank's foreign exchange strategy team recently raised its euro to dollar forecasts to targets of 1.17, 1.20, and 1.25 for 3 months, 6 months, and 12 months, respectively.

Analysts point out that the forces supporting the dollar's sustained strength over the past decade are changing. The excellent returns on US assets have attracted a large inflow of capital, with foreign holdings of US stocks increasing from about $8 trillion in 2020 to about $19 trillion currently, and US bond holdings reaching about $15 trillion.

However, the shift in the narrative of "American exceptionalism" has prompted global investors to reassess their asset allocation strategies. Goldman Sachs believes that most investors currently have an overweight allocation to US assets, and it is expected that the marginal funds flowing into US assets will decrease, and a gradual rotation towards non-US assets will continue to pressure the dollar in the second half of 2025.

Policy Benefits Drive South Korean Won Performance

Among Asian currencies, Goldman Sachs is most optimistic about the South Korean Won. The Won has performed the second best among emerging market Asian currencies this year, and the investment bank expects this trend to continue.

Goldman Sachs believes that the Won has the highest beta coefficient against the dollar among Asian currencies. The presidential election on June 2 produced a decisive result, with Lee Jae-myung of the Democratic Party elected, eliminating some market uncertainties.

The new government has announced a second round of supplementary budget for 2025, amounting to 25.3 trillion won (about 1% of GDP). The government is also prioritizing financial market reforms aimed at enhancing stock market valuations through corporate governance reforms. Since April 2, the Korea Composite Stock Price Index has risen by over 30%, and foreign capital inflow has turned positive ($2.5 billion) in the past month, reversing the net outflow situation that persisted for most of the year.

New Taiwan Dollar Faces Further Appreciation Pressure

Although the New Taiwan Dollar has experienced significant appreciation this year, Goldman Sachs believes there is still further upward pressure Analysts indicate that over the past 4-5 years, the accumulation of U.S. dollar deposits in Taiwan has reached USD 280 billion. This poses further downside risks for the USD/TWD exchange rate, as exporters may raise the foreign exchange conversion rate after the overall trend of the dollar turns downward.

In addition, Taiwanese life insurance companies hold approximately USD 700 billion in overseas assets, of which about USD 200 billion is unhedged. Increasing foreign exchange hedging by selling USD/TWD or other proxy currencies (such as USD/KRW) may exert further downward pressure on these two currency pairs (appreciation of TWD).

RMB Expected to Gain Support

Goldman Sachs points out that the current economic growth in China remains relatively resilient. The decline in exports to the U.S. is partially offset by growth in exports to other markets, and China's exports to major emerging economies help mitigate the decline in exports to the U.S.

Currently, the USD/CNY central parity remains relatively stable, reflecting policymakers' preference for foreign exchange stability.

Goldman Sachs believes that U.S.-China trade negotiations seem to be progressing in an encouraging direction, which will benefit the strengthening of the RMB exchange rate. According to CCTV News, the U.S.-China economic and trade consultation mechanism was previously held in London, where both sides reached a principled consensus on implementing the important consensus from the June 5th call between the two heads of state and consolidating the results of the Geneva economic and trade talks.

Indian Rupee May Become a Relative Laggard

In contrast to other Asian currencies, Goldman Sachs believes that the Indian Rupee will become a relative laggard in Asian foreign exchange, as the Indian central bank may use any capital inflows to reduce large short forward positions.

At the monetary policy committee meeting in June, the Indian central bank unexpectedly cut rates by 50 basis points, committing to maintain loose liquidity while also stating that the rate-cutting cycle has ended, which steepened the bond yield curve. However, a week after the meeting, the Indian central bank decided to halt the daily repo operations introduced in January, which the market interpreted as a hawkish signal.

Analysts indicate that considering the large short forward positions, the Indian central bank may use capital inflows to hedge forward contracts while paying attention to the cross exchange rate with the RMB. Therefore, the fundamental appreciation pressure facing the Rupee is relatively small, and it is expected to lag in the spot appreciation race for the remainder of this year