This year, it is expected that hedging costs in Asia will decrease, and emerging market currencies may lose support.

Due to the rise in the US dollar, Bloomberg's Asian three-month hedging cost index surged to its highest level since October 2022 at the end of last year, suppressing inflows into hedge portfolios in the region. There are signs that this situation may change this year, as US interest rates are expected to remain relatively high compared to Asia, leading to a decrease in hedging costs. Hedged investment flows, which involve shorting local currencies, have less impact on currency support compared to unhedged investments. Stephen Chiu, Chief Asian FX and Rate Strategist at Bloomberg Intelligence in Hong Kong, said, "The increase in hedging costs is temporary. If the Fed does not cut interest rates quickly and the size of rate cuts compared to Asia is not too significant, this situation should decrease this year." "This will provide lower hedging costs for US investors with exposure to Asian currencies and may even increase returns." To explain how hedging works, if a US dollar-based investor wants to hedge Thai baht investments, they would typically short the Thai baht while going long on the US dollar. This means they would receive the US dollar exchange rate while paying the Thai baht exchange rate, and a drop in the 3-month US dollar to Thai baht forward exchange rate would reduce the hedging costs for US dollar investors. Concerns about inflation due to the elasticity of the economy and policies of US President-elect Donald Trump have led investors to be less dovish towards the Federal Reserve. Currently, the Fed funds futures market expects a currency easing of about 40 basis points this year, only half of what was expected for the same period in September last year. Although the recent hawkish shift in Fed policy has prompted the Indonesian central bank to avoid a rate cut in December last year to prevent further pressure on the local currency, the central banks of South Korea and the Philippines have both cut rates in the last quarter. According to the median estimate in a Bloomberg survey of economists, Indonesia, the Philippines, and South Korea are expected to cut rates by 75 basis points each this year. As the prospect of renewed trade tensions weighs on economic growth, policymakers in the region are working to boost economic growth.