A key tension exists for Asian FX. China's central bank is keeping the Yuan stable, providing an anchor for the region. Simultaneously, weak Chinese stocks are driving negative risk sentiment. This forces regional currencies into a difficult choice of which signal to follow, leading to uncertainty.

Despite official statements against rapid currency depreciation in Japan and Korea, policymakers likely view a weaker currency as a beneficial stimulus. With negative output gaps and competition from China, the goal is not to reverse the trend but to manage its pace to avoid market disorder and US Treasury scrutiny.

Contrary to conventional wisdom, a stronger renminbi would exacerbate China's deflationary pressures. This would harm corporate revenues, leading to wage cuts and negatively impacting consumer spending. Therefore, currency appreciation would make the desired economic rebalancing towards consumption more difficult.

The initiation of the Fed's cutting cycle is the critical trigger for a weaker dollar against EM currencies, outweighing any mixed forward-looking commentary. This is because the cycle's start begins to erode the US carry advantage, a key structural factor supporting EM FX performance.

China's central bank is flooding its market with liquidity not just for stimulus, but to bolster its financial system against capital flight through stablecoins. This defensive move aims to prevent citizens from bypassing capital controls, which the government perceives as a major threat to its monetary sovereignty.

The US dollar reached its peak global dominance in the early 2000s. The world is now gradually shifting to a system where multiple currencies (like the euro and yuan) and neutral assets (like gold) share the role of reserve currency, marking a return to a more historically normal state.

China deliberately maintains an undervalued renminbi to make its exports cheaper globally. This strategy props up its manufacturing-led growth model, even though it hinders economic rebalancing and reduces the purchasing power of its own citizens.

The upcoming US-China summit is expected to produce optics over substance. More importantly for traders, the FX market lacks a clear playbook for any outcome. The People's Bank of China (PBOC) has firmly anchored the Yuan, removing any 'trade war risk premium' from the currency and rendering the event largely untradable for FX.

The decline of the US dollar won't result in a simple replacement by the Chinese Yuan. Instead, its core functions are fracturing: 'store of value' is shifting to gold and Bitcoin, while 'medium of exchange' is moving to a multi-polar system of local currencies like the rupee and yuan.