‘U.S.-China Tensions Escalate’ Push Asian Currencies to Five-Month Lows, Major Economies Step Up Defense of Local Units

Asian Foreign Exchange Market Volatility Deepens
Regional Central Banks Intensify Defense Efforts
China Signals Policy Shift on Exchange Rate

As trade tensions between the United States and China intensify, Asian currencies have collectively weakened, prompting major economies in the region to ramp up efforts to defend their local currencies. Analysts view these interventions as merely the beginning, noting that the campaign to stabilize exchange rates could extend for some time. In particular, China’s move to set the yuan’s daily reference rate at its strongest level in a year is being interpreted as a strategic turn from a depreciation-led policy toward a more stable currency management approach.

Sharp Declines in Export-Sensitive Won and Taiwan Dollar

According to Bloomberg on the 16th (local time), Asian currencies recently slid to their lowest levels in months. The Bloomberg Asia Dollar Spot Index fell 0.2% to 91.51 during intraday trading on the 13th, marking its weakest point since May 9—roughly a five-month low. Bloomberg reported, “Among emerging Asian currencies, the Taiwan dollar (TDW) and South Korean won (KRW)—both highly sensitive to trade—posted the steepest declines.”

Morgan Stanley’s MSCI Emerging Market Currency Index also fell for the fifth consecutive session. The index, comprising major emerging-market currencies, dropped as much as 2% during trading, the sharpest decline since April. Morgan Stanley attributed the slump to renewed fears over the rekindling of the U.S.-China trade war, noting that currencies highly exposed to China’s economy and global trade—particularly in Asia—were under pressure.

On October 10, President Donald Trump announced that the U.S. would impose an additional 100% tariff on Chinese imports starting November 1 and restrict exports of key software to China in response to Beijing’s tightening control over rare earth exports. Although Trump struck a conciliatory tone on social media on October 12, market anxiety has yet to subside.

Lloyd Chan, strategist at Japan’s MUFG Bank, said, “Trump’s 100% tariff threat has reignited concerns of heightened U.S.-China trade tensions, pushing Asian markets broadly into risk-off mode.” He added, “Currencies closely tied to China’s outlook and global trade flows—such as the Korean won, Taiwan dollar, and Malaysian ringgit (MYR)—are likely to remain under some pressure.”

Rush to Defend Weakening Currencies

In response, South Korea, China, Japan, and India are all moving swiftly to stem further declines in their respective currencies. In India, the central bank reportedly sold dollars in both onshore and offshore markets on the 16th to defend the rupee from speculative attacks. In South Korea, after the exchange rate breached 1,430 on the 13th, the Ministry of Economy and Finance and the Bank of Korea issued a rare joint verbal intervention, stating, “Foreign exchange authorities are closely monitoring market developments and potential one-sided movements amid heightened volatility.” It was the first such expression of concern over the won’s weakness in a year and a half.

Japan’s Finance Minister Katsunobu Kato also voiced caution last week after the yen hit its weakest level against the dollar in eight months, warning against “excessive and disorderly movements.” He stated, “We are observing one-sided and rapid market moves and will carefully assess these developments.”

Meanwhile, China fixed the yuan’s central parity rate at its strongest level in a year on the 16th, signaling a firm commitment to stabilizing its currency. The daily reference rate serves as Beijing’s primary tool for managing market expectations. Analysts noted that with U.S. trade policy still uncertain, Asian countries are likely to continue defending their currencies for the foreseeable future.

Beijing’s Policy Pivot from Yuan Weakness to Stability

China’s latest intervention marks a break from its long-standing strategy of guiding the yuan lower. The Chinese government had consistently pursued a weaker yuan, including an injection of roughly $140 billion in liquidity last May to drive depreciation. By flooding the market with liquidity, Beijing aimed to weaken the yuan and sustain export competitiveness despite Washington’s tariff offensive, thereby mitigating economic damage through currency adjustment.

This stance runs counter to the Trump administration’s objectives. The U.S. seeks to restore manufacturing competitiveness through a weaker dollar, but a sharp depreciation of Asian currencies effectively lowers the dollar-denominated prices of their exports—widening the U.S. trade deficit. For China, a weaker yuan thus offers a dual advantage: supporting exports while undermining America’s pricing power in global trade.

However, Beijing’s recent efforts to support the yuan suggest that maintaining financial stability now takes precedence over short-term trade gains. Analysts interpret this as a sign that China is prioritizing domestic market stability and advancing its long-term strategy of yuan internationalization. ING’s chief China economist, Lynn Song, observed, “In recent years, China has increasingly prioritized exchange rate stability,” adding that “reducing capital outflow pressures and creating a stable foreign exchange environment will have positive implications for overseas investment and the broader use of the yuan in global trade settlements.”