"Should I Buy Currency ETFs?"... Which Currencies Benefit if US Interest Rates Drop?

Which national currencies are likely to benefit if the U.S. Federal Reserve (Fed) cuts its benchmark interest rate this year?

[Image source=Yonhap News]

Experts have analyzed that, limited to the Asian region, South Korea's won, China's yuan, and India's rupee are likely to strengthen, CNBC reported on the 18th (local time).

In the case of the South Korean won, it has faced downward pressure over the past three years due to U.S. interest rate hikes. When rates are cut, the won can somewhat escape this pressure, and since U.S. rate cuts generally help global economic growth, the won is expected to benefit. Simon Harvey, Head of Foreign Exchange Analysis at Monex, said, "South Korea has low interest rates and high economic cyclicality, so when U.S. rates fall, the won will face less appreciation pressure through the interest rate channel." He added, "Also, U.S. rate cuts can lead to an improved global growth outlook, so the won is expected to be one of the beneficiary currencies of the Fed's rate cuts in the second half of this year."

Harvey also predicted that the extent of the won's appreciation will depend on the magnitude of the Fed's rate cuts. If the rate cut is large, the won could rise by 5-10%, and if small, it could increase by about 3%.

China's yuan is assessed to have little room to fall further. Although China has faced multiple adverse factors in recent years, the Chinese authorities have prevented the yuan from falling below a certain level, making further declines difficult.

Aaron Barras, Chief Investment Officer at Bel Air Investment, said, "When the yuan-dollar exchange rate rises to a certain level reflecting China's economic situation (yuan depreciation), the authorities actively intervene through fiscal policy, monetary credit policy, and real estate stimulus measures, so further weakness is unlikely."

However, since the yuan-dollar exchange rate is expected to remain within a narrow range, there is also a cautionary note that investments betting on yuan strength should be approached carefully.

India's rupee is expected to benefit from carry trades, where money is borrowed from low-interest-rate countries and invested in high-interest-rate countries, if U.S. rates fall. Anindya Banerjee, Vice President at Kotak Securities, said, "Currently, carry trades are conducted with currencies like the yen or euro, but if U.S. rates drop, the interest rate differential will widen, making carry trades with the rupee possible," adding, "This is positive for the rupee."

Expectations that the Reserve Bank of India will ease monetary policy more slowly than other countries are also seen as driving rupee strength. Banerjee said the pace of rate cuts by the Indian central bank will be "much slower" than the Fed's, explaining, "India does not have inflation problems like Europe or the U.S., so it will always lag behind the Fed."