Asia Eyes Interest Rate Cuts As Dollar Weakens

Swap markets in Asia are reflecting an increasing likelihood of interest rate cuts in the region as the U.S. dollar weakens. Swaps in countries such as India, Malaysia, and Thailand are signaling potential easing of monetary policy, buoyed by the strength of regional currencies. This shift in focus is allowing central banks to prioritize growth revival over supporting their exchange rates.

The urgency for rate cuts has intensified, driven by signs of disinflation across Asia. February inflation data from countries including Indonesia, the Philippines, South Korea, Thailand, Taiwan, China, and India came in lower than expected, strengthening the case for monetary easing. This potential policy shift could help mitigate the economic impact of possible tariffs announced by U.S. President Donald Trump in April.

Wee Khoon Chong, a strategist at BNY in Hong Kong, noted, “Recent baht strength could provide more room for the Bank of Thailand to ease its policy further, which would support Thai bonds. Similarly, India’s bonds will benefit from anticipated easing, although index inclusion flows will also play a role in its trajectory.”

Recent market data highlights traders’ increasing dovish expectations. The following is a closer look at developments in key countries.

India: Swaps Reflect Additional Rate Cuts Amid Inflation Weakness

Indian swaps have priced in an additional 37 basis points of rate cuts over the next six months. The Indian rupee has strengthened by over 1.5% since hitting a record low following the Reserve Bank of India’s rate cut on February 7. However, growth faces challenges as U.S. President Trump’s potential tariffs, set to take effect in April, could impact India’s economy.

India’s inflation rate rose by 3.6% in February, below the Reserve Bank of India’s target midpoint of 4%, providing room for further rate cuts to support growth. According to a Bloomberg Economics note last week, the country’s central bank could be more aggressive in its easing. The drop in Brent oil prices, which have fallen more than 10% since January, will also help curb inflationary pressures.

Malaysia: Rate Cuts Likely Despite Reluctance to Ease

While Bank Negara Malaysia remains the only Southeast Asian central bank yet to shift toward easing, Malaysian swaps are now fully pricing in a 25-basis point rate cut within the next 12 months. This marks a shift from the roughly 66% chance of a rate cut as of the end of February.

Malaysia’s economy faces challenges from global trade tensions, particularly due to its reliance on exports to the U.S., its third-largest market for semiconductor exports. The prospect of U.S. tariffs on the chip sector could put further pressure on Malaysia’s growth.

Thailand: Swap Markets Reflect Increased Dovish Expectations

Swaps in Thailand are pricing in a total of 48 basis points of rate cuts over the next year, a 10-basis-point increase compared to levels before the Bank of Thailand’s surprise policy easing last month. Although the Bank of Thailand has emphasized a high threshold for further cuts, traders have priced in more dovish expectations, driven by the government’s preference for looser monetary policy and concerns about Thailand’s export-driven economy being vulnerable to U.S. tariffs.

While the weakening dollar could lead to more policy easing in emerging Asia, Jeffrey Zhang, a strategist at Credit Agricole in Hong Kong, cautioned that this would not necessarily signal a shift to aggressive dovish forward guidance. He explained that central banks will likely seek to avoid causing excessive volatility in their local markets.

As the dollar weakens and inflation remains subdued, Asian central banks are finding more room to maneuver in the face of potential economic challenges, with rate cuts becoming an increasingly likely response in the coming months.