With the currencies of South Korea, Taiwan, and Japan posting notable gains in recent days, speculation is rife that these economies may use a revaluation of their currencies as leverage in their trade negotiations with US President Donald Trump.
Historically, a stronger currency has been a competitive disadvantage for these exporting nations. But with the imminent threat of the return of temporarily suspended US tariffs, currency revaluation could become a relatively inexpensive strategic compromise.
Last week, the Korean won soared after an official acknowledged that exchange rate policy had been discussed at a meeting with US representatives in Milan on May 5. A few days earlier, the Taiwanese currency jumped 8% in the wake of unprecedented talks with Washington. Meanwhile, Japan is trying to schedule a meeting between its finance minister and US Treasury Secretary Scott Bessent on the sidelines of the G7 in Canada to discuss exchange rates.
These moves come in the wake of the surprise 90-day trade truce agreed between Beijing and Washington. For Alicia Garcia-Herrero, chief economist for Asia-Pacific at Natixis, this puts China's neighbors in a delicate position: "This is very bad news for Korea, Japan, and Taiwan. Now they have to offer what China has managed to avoid."
Pressure is mounting as July 8 approaches, the date on which US tariffs of 25-46% on several Asian countries, suspended for three months, could come into effect. In this race against time, currencies are becoming a bargaining chip: "The Koreans might think, 'well actually a stronger currency is in our interest and so we may as well propose this in these negotiations'," said HSBC's chief Asia economist Fred Neumann.
The dollar as a tipping point
Trump and Scott Bessent have stated their preference for a strong dollar, but many observers suspect that the White House is actually seeking to weaken the US currency. Some are even talking about a hypothetical "Mar-a-Lago" agreement, similar to the 1985 Plaza Accord, aimed at lowering the greenback.
"If one country gives in and accepts a moderate appreciation of its currency, it could create a domino effect," explains Homin Lee, macro strategist at Lombard Odier in Singapore.
For the markets, a weaker dollar would likely reduce US trade deficits. This would partly explain the recent decline in the greenback and the fall in dollar-denominated assets.
Taiwan, whose currency has risen sharply, denies any pressure from Washington. But a source close to the matter acknowledges that "currency issues will eventually be addressed in the negotiations. No one can resist US pressure."
A risky bet for Asia
Technically, most Asian currencies are below their long-term real value, adjusted for inflation and trade. This would give them theoretical room for appreciation.
But this undervaluation also reflects structural disinflationary pressures in these economies, which make their goods increasingly competitive in export markets. "A revaluation would exacerbate these pressures and could increase the risk of deflation," warns Claudio Piron, a strategist at Bank of America.
In addition, any fall in the dollar could trigger massive sales of US assets by Asian countries, which collectively hold tens of trillions of dollars in foreign exchange reserves, bonds, and bank deposits.
Finally, even in the least open markets in Asia, the real ability of governments to manipulate exchange rates is limited. "Today, central banks can only slightly counteract the trend. They no longer control the direction of the market," summarizes Fred Neumann.
For Tohru Sasaki, strategist at Fukuoka Financial Group, a Plaza Accord-type agreement is unlikely: "Some dream of a 10% stronger yen against the dollar, but how can this be achieved and, above all, how can it be maintained? It would be an illusion. In reality, it's impossible."
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