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Markets are undergoing seismic changes, rocked by elevated volatility as US interest rates and a faltering US dollar reshape the business landscape. This turbulence is pushing corporates and investors to rethink their strategies, including reducing their US dollar exposure and exploring trade settlement in local currencies in what is a potential structural shift.
Speaking at the opening of the 7th APAC Treasury Lab organized by BNP Paribas in Singapore, Parisha Saimbi, EM Asia FXLM strategist at BNP Paribas, highlights the need for companies to navigate the macroeconomic uncertainty and market volatility.
The shifting US tariff policies are expected to fundamentally alter the trade environment. Beyond broad tariffs, concerns exist about sectoral tariffs impacting key supply chains, particularly in Asia.
Asian economies are particularly vulnerable due to their reliance on exports to the US, with countries such as Vietnam, Taiwan, and South Korea facing significant exposure. However, potential offsets exist. Some countries, such as Vietnam, South Korea, and Thailand, could benefit by serving as substitute exporters to the US if China is less accessible. Furthermore, increased foreign direct investment (FDI) from China into other Asian manufacturing hubs like Malaysia and Vietnam is expected to continue, building regional capacity and offering an alternative to goods directly from China.
“As corporates continue to prioritize diversification, we are witnessing a surge in treasury centers being set up across Southeast Asia, driven by MNCs seeking to capitalize on the region’s growth potential and expand their footprint across ASEAN, Asia and into new global markets,” said Rupa Balsekar, head of transaction banking for Southeast Asia, BNP Paribas. According to Balsekar, the diversity of Southeast Asia markets offers a great opportunity for corporates seeking to expand their operations.
Corporate responses to the new US trade policy indicate a strong intention to pass on tariff costs to US consumers by raising prices. A significant portion of companies are also actively seeking alternative export destinations and diversifying their trading partners, reflecting an expectation that tariffs may be structural.
Economically, the base case scenario forecasts slowing growth in the US, though it is expected to be a temporary soft patch rather than an enduring trend. Coupled with a labour market still near full employment, inflation is likely to consistently exceed the Fed's target, pushing above 3.5% over the next year, notes Saimbi. A cautious policy approach would be typical with this backdrop, but the relentless political pressure on the Fed to drive a sustained focus on employment over inflation, will likely result in further two 25bp rate cuts this year, followed by two more in 2026.
While higher tariffs and lingering trade uncertainty will continue to weigh on the global economy, Europe is projected to see growth benefits from the significant fiscal stimulus package acting as an offset to tariff impacts. China faces a meaningful hit to GDP from tariffs, requiring further stimulus measures, likely focusing on boosting domestic consumption through rate cuts and bond issuance, though a measured pace is expected.
Across Asia, weakening growth is the prevalent picture, necessitating more central bank support, with further rate cuts likely. Countries may also try to provide fiscal support, like South Korea. Medium-term recovery hopes for Asia are tied to FDI, China’s consumption growth, and lower energy prices, but are seen as a “next year story”.
For markets, the rising concern over US assets, partly due to recession risks and institution independence concerns, has sparked a prevalent de-dollarization theme. The US dollar is seen on a likely path to weaken further, from still structurally rich levels, according to BNP Paribas’ long-term fair value model (BNP Paribas FEER), as global investors continue to reduce their overweight USD exposure. The euro is projected to be the biggest beneficiary of this trend, supported by its fiscal stimulus-backed growth prospects. Asian currencies are broadly expected to underperform.
For corporate treasurers, key considerations include the need to potentially move out of US dollar holdings if US rates fall and actively explore hedging strategies against the US dollar weakness. The structural shift also implies potentially increased use of other major currencies like the euro, Japanese yen, and the Chinese renminbi for trade settlement.
Finally, the expectation for a relatively “orderly implementation” of tariffs, despite the unpredictable nature of policy announcements, is significantly influenced by the US administration’s vigilance regarding bond markets. The pressure exerted by market sell-offs, particularly in Treasuries which impact US debt interest costs, has historically led to policy adjustments like tariff delays. While the negotiation process remains challenging, market dynamics are seen as a constraint preventing totally disruptive actions.
