While the EUR/USD exchange rate has remained relatively unchanged in recent weeks, the CNY, THB and, in particular, the MYR have strengthened against the USD, while the JPY and KRW have weakened.
The USD is moving slowly but steadily downward. This should be reinforced by the temporary agreement between China and the US, which represents a defeat for the Americans. They had to concede much more than they had previously realised or would have liked.
When It Comes to Rare Earths, the US is Clearly Vulnerable to Blackmail
It is an illusion to believe that the West will be able to master the refining process within the next one to two years. It lacks the necessary facilities, personnel and expertise. While the expertise does exist in principle, it will take at least four to six years before there are sufficient numbers of people with the relevant skills to make a difference. During this time, any geostrategic escalation of the conflict with China is unrealistic.
Time Is on China’s Side
In addition to rare earths, China is the global market leader in many areas, or is well on its way to becoming one. China is just as successful as the US in developing AI, and is also catching up quickly in chip production and development.
With the exception of South Korea, it is almost impossible to catch up with China’s lead in battery technology. When it comes to rare earths, China has a valid bargaining chip.
I would only start to worry if the West became self-sufficient. After all, it’s not without reason that the US renamed its Department of Defense the Department of War.
Outlook for 2026
The temporary truce will boost growth in Asia. China will continue its efforts to become independent in other relevant areas, and to achieve technological leadership.
This will not only lead to continued investment in China, but also have a knock-on effect on the region. China has become increasingly important to the region, and can now present itself as a better and more reliable trading partner than the US, which is behaving like a schoolyard bully.
Outside of Japan, inflation is not a problem in Asia. Neither Indonesia nor Malaysia are experiencing any significant inflation. However, interest rates are still too high, especially given the rise in Asian currencies against the USD. Further interest rate cuts are therefore to be expected, which will stimulate economic development further. Falling interest rates are good for the economy and therefore beneficial for currency development.
With the exception of Japan, debt is not a major concern in Asia.
For the purposes of this argument, assume that there will still be ample liquidity in 2026. This suggests that concerns about a stock market crash followed by a recession are unfounded. However, stock market valuations are currently so extreme that this area will require close monitoring.
2026 will be a good year for the economy in Asia, with currencies strengthening against the US dollar, but probably not against the euro. If the USD falls sharply, as I expect, Asian currencies will tend to weaken slightly against the euro.
