Market participants remain acutely aware of the risks facing the world, particularly due to energy costs, with the price of Brent oil having risen from around USD88 to USD108 over the past month. At the same time, confidence in US economic growth remains resolute. Nonetheless, the US dollar has edged lower over the past month from 99.96 to 99.1. This follows stability through late-July and early-August.
Over the past month, the most significant move in the bilateral exchange rates that determine the DXY US dollar index has been in the yen cross. While August’s joint intervention by the US and Japan had little net effect, reports of Japanese authorities requesting major domestic institutional investors adjust their portfolios and currency management to favour the yen, paired with a strengthening in Bank of Japan policy expectations, have since proven effective.
In August, USD/JPY’s initial decline from JPY164 to JPY155 reversed quickly back to near JPY160. But in September, USD/JPY has broken through JPY155 and tested JPY154.
The current move certainly remains contingent on the Bank of Japan delivering on policy, the market having priced a series of hikes through to mid-2027. But, if authorities also prove successful in resetting capital flows related to the yen, the move to JPY154 can not only be sustained but also extended – in time.
For now we retain a cautious view, forecasting a slow descent to JPY146 at end-2028. However, as that level is 32% above the pair’s long-term pre-pandemic average (1990-2019), there is clearly plenty of scope for a material upside surprise for the yen. Though, the timing and scale will largely be up to the actions of Japan’s authorities and the long-term opportunities investors perceive in Japanese industry and real assets.
The other major determinants of the DXY index, euro and sterling, have only ground higher over the past month. Data has generally been positive for the Euro Area and UK; although growth is, at best, converging to trend while the US continues to outperform.
Rate expectations are similarly priced for the Euro Area, UK and US – all arguably overstate the degree of tightening necessary. As such, a period of relative currency stability is likely into year-end before a softer US economy and continued uptrend in European and UK growth bear fruit in 2027.
From USD1.16 today, we see euro edging higher to USD1.17 at year end, before a steady appreciation through 2027 to USD1.21, then USD1.22 in the first half of 2028. Sterling is expected to hold at its current rate until this December, USD1.35, and then appreciate to USD1.39 through 2027 and to USD1.41 by mid-2028.
From their respective starting points, euro and sterling also likely have upside potential against the US dollar. Though it will take time to show, and only if downside risks crystallise for the US economy. The yen outperforming would arguably also benefit euro and sterling against the US dollar, pushing the DXY index away from its 10-year average at 98.7 and focusing participants attention on the 20-year average of 90.8, circa 8% below today’s spot rate.
The rest of Asia is also expected to strengthen against the US dollar as developed-world inflation risks abate and future growth opportunities are focused on.
Closely tied to global growth and development, and with no concerns over inflation or its fiscal position, Singapore’s dollar has already appreciated back near its 5-year high versus the US dollar, currently SGD1.2680. A run towards its all-time high is certainly on the cards, albeit not our base expectation, with USD/SGD forecast to trade at SGD1.25 in late-2028 compared to 2012’s (brief) low of SGD1.22.
China’s renminbi has appreciated at a slower rate than Singapore’s dollar to date in 2026, USD/CNY falling from CNY6.99 to CNY6.71. But we expect there are significant gains to come, with the pair forecast to trade down to CNY6.30 in late-2028 on our baseline view, with the risks favouring a stronger renminbi.
For the renminbi to surprise to the upside, arguably China’s authorities will need to show initiative with policy and remove some, or all, of the downside risks for domestic demand. Although, an easing of geopolitical tensions which the market has confidence in would also likely provide material benefit to China’s valuation.
Asia more broadly has experienced mixed trading this year given weak starting levels and a mix of global and domestic risks. Still, if uncertainty recedes over the forecast horizon, and key nations such as Singapore, China, South Korea and Japan post economic wins, the rest of the region should experience a gradual appreciation in the months that follow.
Given the development opportunities before them, in time this could transition into a lasting structural uptrend. This would benefit the region’s purchasing power and inflation management, albeit not at the expense of competitiveness, with productivity gains expected to outpace currency appreciation.
This analysis was first released in Westpac Economics’ September Market Outlook.
