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Tariff-mania!
As a result of the punitive reciprocal tariffs announced on “Liberation Day’, our macroeconomics team has downgraded US GDP growth forecast this year from 1.8% to 1.0%. The probability of a recession in the US is now raised to 40%, from 20 to 25% previously. Consequently, our macroeconomics team now see the Fed making 3 x 25 bps cuts this year (from 1 x 25 bps cut previously), dropping the Fed Funds Rate to 3.75% (upper) by the end of the year.
The USD outlook in the G-10 FX space is largely driven by rate differentials rather than US trade policy. As a result of our updated view of 3 x 25 bps cuts from the Fed, the USD’s rate advantage relative to its Major FX peers will narrow considerably as Fed rate expectations converge towards that of its peers.
Consequently, we now expect a lower US Dollar Index (DXY) trajectory compared to our last review a month ago. Our updated DXY forecasts now lays out renewed weakness from 101.6 at end-2Q25 to 98.6 at end-1Q26. Overall, we see EUR/USD, GBP/USD, AUD/USD strengthening to 1.14, 1.36 and 0.65 respectively by end of the year. Similarly, USD/JPY is expected to drop to 142 by end of the year as well.
As for Asia FX, the calm that we witnessed in the opening months of the year indeed did not last. By now, there is little doubt that most Asia FX looks set to begin its next phase of weakness after the Trump administration slapped punitive tariffs on various Asian economies. The potential for growth downgrade across the region will likely range between -0.4 and -1.0 ppts if there is no further improvement in the tariff situation. Sustained portfolio outflows on increased global recession worries are likely to exacerbate the regional currencies selloff.
In all, we reiterate the view of further Asia FX weakness till 3Q25 before stabilising from 4Q25. Once again, CNY will lead the anticipated weakening of Asia FX and we forecast USD/CNY rising to 7.80 by 3Q25. Concurrently, USD/SGD, USD/MYR, USD/IDR, USD/THB and USD/VND are expected to rise to 1.39, 4.70, 17,200, 36.00 and 27,200 respectively by 3Q25.
Monetary policy expectations remain the primary driver of our level forecast for money market rates and bond yields. In line with our expectations of 3 x 25 bps Fed cuts this year, we now see 3M compounded in arrears Sofr at around 3.77% by end 2025 (from 4.13% previously). For our base case, we forecast the 3M compounded in arrears Sora at 2.17% by end 2025 (from 2.61% previously). In constructing our Sora view, we have assumed ongoing uncertainty to favour domestic liquidity conditions as Singapore functions as a relative safe haven.
In the back end, we now see 10Y UST yield ending 2025 at 3.90% (from 4.30% previously). A deeper collapse in 10Y UST yield to the low 3% region cannot be ruled out should recession expectations become mainstream. Similarly, we see 10Y SGS yield easing further to 2.50% by end 2025 (from 2.90% previously).
Heng Koon How
Head of Markets Strategy
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Peter Chia
Senior FX Strategist
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Victor Yong
Interest Rates Strategist
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Quek Ser Leang
Senior Technical Strategist
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