The recent surge in global bond yields has had a significant impact on Emerging Market (EM) currencies in Asia, particularly those of oil-importing countries. This phenomenon is a result of a perfect storm of factors, including rising oil prices, unresolved geopolitical tensions, and mounting fiscal concerns in major economies like the UK and US. The Strait of Hormuz, a critical shipping route, has been closed for nearly eleven weeks, with no breakthrough in sight from the Trump-Xi summit, leading to a spike in Brent oil prices above US$110/bbl. This, coupled with the surge in US 10-year Treasury yields to 4.594%, the highest since May 2025, and the 30-year hitting 5.127%, has created a challenging environment for EM currencies.
What makes this situation particularly intriguing is the interplay between rising inflation expectations and real yields. The 10-year TIPS real yields have risen sharply to around 2.05%, which is more detrimental to risk assets and EM currencies than nominal yield moves alone. This dynamic highlights the complex nature of the current market conditions, where multiple factors are simultaneously affecting currency values.
In Asia, the MSCI EM Currency Index suffered its worst weekly performance since early March, with the Indian rupee taking the brunt of the impact. It breached 96 per dollar for the first time on record, depreciating by roughly 5.5% since the Iran conflict began in late February. The Thai baht and Philippine peso also underperformed, while the New Zealand dollar fell toward 0.5850 due to rising Fed rate hike expectations. The correlation between Brent crude and the Bloomberg Dollar Spot Index has reached 0.55, the highest since the index's inception, further squeezing Asian oil importers.
To combat the foreign exchange reserve pressures, India tightened silver import rules and required prior government approval for silver bar imports, while Sri Lanka imposed a 50% import duty surcharge on private vehicles for three months. These measures demonstrate the urgency of the situation and the need for governments to take proactive steps to stabilize their currencies.
Looking ahead, the G7 Finance Ministers and Central Bank Governors meeting in Paris will discuss the global bond selloff, and the White House has confirmed China's agreement to purchase at least $17 billion of US agricultural products annually through 2028. While this agreement offers some relief for Asian markets, the spike in US yields and the Strait of Hormuz impasse remain the dominant macro variables. China's April activity data, which signal a two-speed economy, will also be closely watched.
In conclusion, the sharp rise in global bond yields has had a profound impact on EM currencies in Asia, particularly oil-importing countries. The interplay between rising inflation expectations and real yields, coupled with geopolitical tensions and fiscal concerns, creates a complex and challenging environment for currency values. As governments take measures to stabilize their currencies, the market dynamics will continue to evolve, and the impact on EM currencies will remain a key focus for investors and policymakers alike.
