Currency traders across Asia are facing a challenging environment as rising tariff risks, technological breakthroughs, and impending holidays create a climate of uncertainty, leaving hedge funds unsure of how to position their bets, according to a report by Bloomberg.
The US dollar gained ground on Tuesday, rising as much as 0.5% in Asia, but its performance has been erratic throughout the week. The swings come as traders react to escalating tariff concerns and the disruptive potential of DeepSeek, a Chinese AI startup whose low-cost model has been compared to the Soviet Union’s 1957 Sputnik moment by investor Marc Andreessen. The implications of DeepSeek’s breakthrough have stoked fears about the impact on inflated US tech valuations, further unsettling the markets.
The $300bn-plus foreign exchange options market reflects the current confusion. “There’s a decent concoction of option requests without a conspicuous theme,” said Mukund Daga, Head of Foreign-Exchange Options for Asia at Barclays Bank in Singapore. “We’ve seen new directional trades being put as well as unwinds of existing trades.”
Just a day earlier, there had been a noticeable uptick in hedge fund demand for options betting on the US dollar to weaken against safe-haven currencies like the Japanese yen and Swiss franc, according to Sagar Sambrani, Senior Foreign-Exchange Options Trader at Nomura in London. Now, the lack of clear conviction has left traders unsure whether to stick to those positions or abandon them.
“Markets are befuddled whether or not to unwind the Trump trade or put it back there,” said Vishnu Varathan, Head of Economics and Strategy at Mizuho Bank. “It feels like everything is in a wash — you can’t tell any direction, and there’s no conviction of trade.”
The uncertainty around DeepSeek has added to broader risk-off sentiment, with investors increasingly hesitant to take aggressive positions. Compounding the unease are impending policy decisions from the Federal Reserve and the European Central Bank, which are likely to influence global currency movements.
Adding to the challenge, the upcoming Lunar New Year holiday is reducing market liquidity, leaving currencies vulnerable to sharp swings driven by headline news. Alvin Tan, a strategist at RBC Capital Markets in Singapore, described Tuesday’s trading environment as subdued. “There’s very, very little activity we are seeing here today,” he noted.
Tariff fears have also returned to the forefront after US President Donald Trump and Treasury Secretary Scott Bessent hinted that a recent lull in trade tensions may be over. The renewed concerns have contributed to the dollar’s gains but have also left traders questioning the longer-term outlook for global trade and currency markets.
