The Fed Is Containing Yuan Bears. That’s Ironic

After a bruising few years, Asian currencies have suddenly become fashionable again. But this enthusiasm is dependent on words and deeds far away. The direction of global markets is driven overwhelmingly by the US. For now, that means interest-rate cuts by the Federal Reserve. Long depicted as Asia’s engine, China’s economic outlook is deteriorating, even as its currency is lifted by the tide generated in Washington. It would be imprudent to get too excited about Asia’s FX prospects without understanding the roots of the newfound positivity.

The prospect of easing by the Fed, the most powerful central bank and guardian of the dollar, has pushed the greenback down — and counterparts up. The yen’s rally, given an added boost from a recent surprise rate hike, has attracted the most attention. That seems only fair, given how beaten up Japan's exchange rate had been. The Thai baht and Indonesia’s rupiah have notched notable appreciations. Even the ringgit, whose lack of fans had frustrated officials in Kuala Lumpur, is having a strong run. Further afield, the Swiss franc and British pound are viewed more positively. But there may be an even more compelling story: the yuan.