US-China tariff truce gives Asia time and space to reset

The US and China have agreed to sharply lower tariffs for the next 90 days, offering a crucial pause in a trade war that is straining global supply chains and testing the patience of capital markets. 

The deal, struck in Geneva, Switzerland, and announced on Monday (May 12), cuts US tariffs on Chinese goods from 145% to 30% and reduces Chinese duties on American imports from 125% to 10%. 

While limited in duration and uncertain in outcome, the agreement is already delivering tangible effects on Asian markets, currencies and sentiment.

Asian equities rallied in the immediate aftermath, led by exporters, semiconductor manufacturers and industrials. Hong Kong’s Hang Seng Tech Index up 5.2% at the close, the biggest gain in two months.

The most telling response could be in foreign exchange markets. The dollar enjoyed its best day in over a month on a trade-weighted basis, but the big question for FX markets going forward is whether the damage to the greenback’s long-term standing has already been done.

While the initial market reaction today was clearly dollar-positive, it also reflected stretched short positioning being unwound, Bloomberg reported. Before today’s announcement, the Taiwan dollar surged and was up more than 8% against the greenback this year, and certain other Asian currencies have followed suit. 

This isn’t just noise or temporary rebalancing; it’s a shift in positioning. The recent strength in Asian currencies reflects two key forces. First, a mechanical one: lower tariffs reduce inflationary pressure on imported goods, giving central banks in emerging Asia more breathing room. 

Countries like India, the Philippines and Indonesia—previously walking a tightrope between rate hikes and growth support—now have marginally more flexibility to prioritize domestic conditions over external risk defense.

Second, and more importantly, capital is moving. Asian corporates are going to be repatriating profits held abroad. Hedge funds and asset managers are rotating out of overbought dollar trades. 

Demand for currency hedging tools in Japan is accelerating, with businesses using the opportunity to lock in more favourable terms after months of volatility. The market has begun to reprice not just risk, but opportunity.

What’s changed is not that investors suddenly believe in a US-China reconciliation. It’s that the relentless assumption of further deterioration has paused. In financial markets, a change in direction—however modest—often triggers a bigger response than a continuation of trend.

The trade war has been the defining economic risk of the past six months. Asia, with its complex production ecosystems and deep trade linkages, has not been uniquely exposed, but it has been consistently sensitive. 

Taiwanese chipmakers, South Korean electronics exporters, Japanese machinery firms, and Vietnamese assemblers—all sit within multi-step supply chains that depend on predictability. Tariffs didn’t just add costs; they added paralysis.

Now, at last some of that paralysis will ease. With a 90-day window of reduced tariffs, companies can begin to make decisions again on procurement, hiring, shipments and capital expenditure. 

Banks across the region will likely see renewed interest from corporates in restarting previously paused investment programs. In Southeast Asia, where many firms had delayed cross-border expansions due to tariff uncertainty, there will be almost immediate signs of renewed planning activity.

This uptick in activity will be further supported by softening of the US dollar.  A weaker dollar typically amplifies flows into emerging markets, and this time will be no different. 

Dollar debt becomes less expensive to service. Commodities, priced in dollars, become more affordable. And Asian sovereign bonds and equities, which had been priced defensively, are seeing tentative inflows once again.

Yet, it would be dangerous to confuse this shift in tone with a genuine resolution of US-China tensions. The Geneva agreement is limited in scope and temporary by design. It has no enforcement mechanism, and its foundation is fragile. 

President Trump’s post-deal remarks, suggesting an 80% tariff may be appropriate “next time,” underline how fluid the situation remains. What this does signal, however, is that the world’s two largest economies are under pressure. 

The US is managing voter anxiety over consumer prices and economic stagnation. China is working to stabilize industrial activity and re-anchor investor confidence. Neither can afford a fully ruptured trade relationship—at least not right now.

That shared constraint is what gives the truce its temporary weight. It’s enough to jolt markets out of siege mode. It’s enough to provide space for Asia’s policymakers to shift out of reaction and into strategy. And it’s enough for investors to reconsider allocations toward Asia’s growth story.

Asia remains home to some of the most productive export-led economies, dynamic consumer markets and fast-adapting tech players in the world. The tariff war obscured that strength by injecting external risk. The truce clears just enough of the fog to make the regional case visible again.

Still, risks remain. A breakdown in talks, a political turn in Washington or new measures targeting tech or capital markets could quickly sour the current optimism. Investors who rush in unhedged or overweighted could find themselves wrong-footed if the detente proves fleeting.

But for now, Asia is expected to regain its footing, seen in today’s rise in equity markets and firming currencies.