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 a positive terms-of-trade shock from rising energy prices, the Norwegian Krone (NOK) has underperformed its fair value. This is because a crowded 'long NOK' trade led to deleveraging, demonstrating how existing market positioning can temporarily override fundamental drivers during market stress.

The dollar's decline, particularly in April, was not driven by investors divesting from US assets. Instead, it was caused by investors with large, unhedged dollar exposures belatedly adding hedges. This involves selling dollars in the spot or forward markets, creating downward pressure without actual asset sales.

Paradoxically, foreign investors are large net sellers in booming Korean and Taiwanese markets. This isn't a bearish call on the AI theme. Rather, for long-only Emerging Market funds, the outsized performance of a few large-cap tech stocks has caused these positions to breach portfolio concentration and risk management limits, forcing them to trim holdings.

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.

North Asian economies, despite current account surpluses, exhibit balance-of-payments dynamics typical of deficit countries. This is caused by exporters holding dollars, domestic capital outflows, and foreigners hedging equity investments. This structural imbalance acts as a powerful headwind for regional currencies, overriding positive trade data.

Despite a massive positive shock from semiconductor exports, South Korea's currency (the won) has weakened. This is partly because retail investors are taking their profits and buying US tech stocks instead of reinvesting domestically, creating capital outflows that offset the strong current account surplus.

For a long-term (5+ year) value investing strategy in emerging markets, hedging currency exposure is typically too expensive to be viable. The approach relies on the assumption that when buying into a country under pressure, significant currency devaluation is already priced in, making the high cost of hedging unnecessary.

The U.S. dollar's decline is forecast to persist into H1 2026, driven by more than just policy shifts. As U.S. interest rate advantages narrow relative to the rest of the world, hedging costs for foreign investors decrease. This provides a greater incentive for investors to hedge their currency exposure, leading to increased dollar selling.