The Fire Horse at Mid-Year: When Capital Flows Outrun Fundamentals

Asian currencies are likely to recover selectively because capital-flow dynamics have temporarily overwhelmed resilient fundamentals, creating greater opportunities through regional dispersion than through a broad-based currency view.

• At the start of 2026, M&G expected stronger trade balances and changing capital allocation to challenge US dollar dominance, but the US-Iran conflict at the end of February triggered volatility and an oil-price surge that hurt Asian currencies reliant on imported energy.
• The Philippine peso, Thai baht and Indian rupee came under pressure from higher oil costs, while Indonesian rupiah weakness intensified as foreign outflows raised concerns about fiscal policy and President Prabowo’s policy direction.
• South Korea’s won was also pressured by equity outflows and domestic investors’ overseas investment despite AI-led export growth and a healthy current account, before recovering sharply from July as exporters converted more foreign-currency earnings; China’s renminbi appreciated steadily under policymakers’ preference for a stronger currency.
• M&G calculates that nine Asian currencies fell 4.5% on average from peak to trough this year, versus 12% during the 2022 energy shock, while India and South Korea retain foreign-exchange reserves of approximately $700 billion and $400 billion respectively.
• Policymakers are broadening their response beyond intervention and interest rates: India’s reforms improved access to government securities, and its FCNR(B) programme attracted $52.3 billion by 13 August, prompting the Reserve Bank of India to close its concessional swap window one month early.

Takeaway: If US-Iran tensions do not escalate, contained inflation, stronger technology exports, attractive valuations and credible policy responses could support selected Asian currencies and local bonds, but investors should focus on country-level dispersion rather than expect a uniform regional recovery.