The DBS Equilibrium Exchange Rates (or DEER) indicate fair values for global currencies relative to a trade-weighted currency basket.

The United States Dollar (USD) has surged amid threats of Trump tariffs, and its valuation now stands at its highest in over 20 years. Still, Trump has not followed through with any tariffs since his inauguration on 20 Jan. He has also said that he would rather not impose tariffs on China, and that all that he is seeking is a fair trading relationship with China. This suggests that any decisions on tariffs could depend on the outcome of US-China negotiations, with Trump and China's Xi having discussed various issues related to trade, fentanyl and TikTok. The USD could ease from its highs if the threat of imminent US tariffs lessens.

The Japanese Yen (JPY) remains the most undervalued across major currencies. USD/JPY has pulled back from 160 amid an easing of the USD, and a January BOJ rate hike which brought the overnight call rate to 0.50%, the highest since 2008. The BOJ's median core inflation forecasts for FY25 and FY26 have also been revised up to 2.4% and 2.0% respectively, with the BOJ expecting risks to prices to be skewed towards the upside. Governor Ueda also mentioned that the current rate is still far from neutral levels, and that the economy is moving in line with the BOJ's outlook. Given that BOJ is reducing policy accommodation while other central banks' policies are turning less restrictive, rate differentials are set to narrow and could help temper JPY weakness.