AI export gains may not translate into Asian currency appreciation, as policy recycling mechanisms and capital-account openness determine currency divergence

Overview

The report examines how Asia's AI capital-expenditure boom affects regional exchange rates through exports, current accounts, capital accounts, and policy regimes. Its central conclusion is that Asian currencies have not mechanically appreciated alongside AI-driven export gains because economies recycle surpluses overseas through reserves, sovereign funds, insurance capital, and private portfolio investment. Differences in the ability to capture value, financial openness, exchange-rate policy, and valuation levels have consequently produced significant currency divergence.

Core views

The current AI capital-expenditure cycle is providing a strong external boost to the economies associated with Asia's low-yielding currencies, particularly Taiwan, South Korea, Singapore, and Malaysia, which are deeply integrated into the electronics supply chain. The link between U.S. equipment and intellectual-property investment and Asia's export cycle is not new, but the scale of the current cycle is unprecedented: relevant investment components have grown 6.6% annually since 2025, more than double the sub-3% average of the preceding decade, while first-quarter growth reached an annualized quarter-on-quarter rate of 8.9%. The buildout of AI computing capacity is more memory-chip-intensive, allowing South Korea to receive a larger demand windfall than in previous cycles and driving a marked strengthening in Asian export data. However, the transmission from the export boom to currency appreciation has weakened significantly. The traditional “Dutch disease” pathway is that a current-account surplus pushes up the domestic currency, after which an excessively strong exchange rate damages competitiveness when the boom ends. The usual policy response is to accumulate foreign-exchange reserves or sovereign wealth during the upswing, or to invest the gains in productivity-enhancing projects. The former both restrains excessive nominal appreciation and creates a buffer to stabilize the exchange rate and support household income during a cyclical downturn. In recent years, Asia has implemented such surplus-recycling mechanisms through foreign-exchange regulation and institutionalized capital outflows: although TWD and KRW are theoretically best positioned to capture AI gains, both have actually depreciated against their respective nominal effective exchange-rate baskets since mid-2025; SGD has appreciated gradually because of the Monetary Authority of Singapore's tendency to restrain imported inflation; and MYR has rebounded from extremely undervalued levels to a position JPMorgan considers relatively fair. The report views this decoupling between exports and exchange rates as healthy while RMB remains cheap. Historically, Asian technology-export surpluses were initially recycled mainly through foreign-exchange reserves. As populations aged and domestic investment cycles weakened, recycling shifted toward private-sector overseas savings. After the yen's valuation doubled between 1985 and 1987, Japan became a capital exporter in the 1990s through overseas direct investment and the relocation of production. Taiwan subsequently became the most representative example, as local life insurers accumulated substantial overseas assets during the 2010s, lifting its net international investment position in recent years to an average of more than 200% of GDP. Taiwan's central bank keeps the TWD nominal effective exchange rate within an implicit “dynamic stability corridor,” illustrated in the report as a policy range of roughly 5% above and below its three-year moving average. De-dollarization pressure in 2025 caused the TWD NEER to rise 10% in three trading days, but the regime ultimately did not break down. TWD subsequently depreciated 10%, while adjustments to regulatory guidance continued to steer capital flows. Singapore, meanwhile, uses sovereign wealth funds to invest the Monetary Authority of Singapore's excess foreign-exchange reserves overseas and conducts monetary policy through an explicit S$NEER policy band. Large inflows into SGD deposits have been absorbed through lower-than-usual interest rates and continued liquidity injections, indicating that policy does not favor higher rates. Taiwan and Singapore employ different specific mechanisms, but both use policy bands and institutionalized financial-account outflows to prevent excessive nominal appreciation. They also create relative-value differences when their forward curves and NEERs occupy different positions within their respective policy bands. Given policy constraints at both ends, the report maintains its short SGD/TWD position, reflecting a relatively bearish view on SGD and a bullish view on TWD. South Korea and Malaysia provide another contrast in supply-chain value capture and financial openness. South Korea substantially relaxed restrictions on capital outflows during the 2010s, becoming one of Asia's most open financial accounts. Population stagnation, falling domestic interest rates, unhedged overseas investment by the national pension fund, and retail purchases of U.S. equities have created persistent headwinds for KRW. The current AI boom also raised foreign ownership of Korean equities to a ten-year high in early 2026, but concentration limits on holdings in two memory-chip companies forced foreign investors to take profits, generating more than US$100 billion of portfolio investment outflows year-to-date. The report argues that foreign investors effectively realized in advance the net present value of several years of AI gains, causing outflows to outweigh the year's current-account benefits. KRW only recently began participating in the AI rally following tax-related repatriation flows. Malaysia is more concentrated in semiconductor assembly, testing, and packaging, and therefore captures less value than South Korea and Taiwan do from leading-edge memory and wafer fabrication. Although the improvement in the electronics trade balance was equivalent to 10% of GDP, Malaysia's current account remained stable at around 1.5% of GDP. The gap between the customs trade balance and the balance-of-payments goods balance indicates that local factories' participation in complex regional supply chains did not generate commensurate manufacturing-service income or foreign-exchange conversion. The more promising incremental contribution comes from the ICT services balance, which has improved by the equivalent of 0.5% of GDP since 2022. Only around 20% of data-center capacity is currently operational, and additional capacity could further improve the current account over the next several years, although foreign-direct-investment-led construction may also generate dividend remittances. Because capital outflows are relatively tightly constrained, MYR exhibits asymmetric sensitivity to the dollar: its depreciation elasticity is limited when the dollar strengthens, while it has a relative performance advantage in a weak-dollar environment. The report therefore continues to favor expressing its MYR view from the long side. Thailand provides the region's clearest counterexample of “Dutch disease,” although the initial shock came from tourism rather than AI. Booming revenue from Chinese tourists during the 2010s masked deterioration in the goods trade balance and shifted labor from more productive fields such as electronics engineering into hotel services, gradually crowding Thailand out of the electronics supply chain. Manufacturing and tourism together explain more than half of the Thai economy's roughly 10% GDP shortfall relative to its pre-pandemic path. Investment growth from 2021 to 2024 was only half its pre-pandemic rate, with weak investment widening the savings-investment gap and sustaining the current-account surplus. At the same time, gray capital flows and hedged overseas investment weakened the ability to recycle the surplus, leaving THB approximately 8% overvalued even after a partial correction this year and further suppressing manufacturing competitiveness. Because of its experience during the 1997 crisis, the Bank of Thailand has an asymmetric intervention bias: it resists THB depreciation more actively but does less to prevent THB appreciation. Although it expressed concern about excessive THB strength in late 2025, it resisted THB weakness more forcefully in the second quarter of 2026 because energy prices could increase imported inflation. This stance persisted through June and July even as crude oil fell to around US$70 per barrel. The report still believes that a stable civilian government, a recovery in investment, and regulatory measures targeting gray capital flows or gold trading should help correct THB overvaluation over the long term. However, a reversal in the dollar, the Bank of Thailand's reaction function, and crowded positioning all pose risks to short positions. JPMorgan has therefore reduced the FX underweight in THB within its GBI-EM portfolio and will wait for the dollar to regain strong upward momentum before restoring the full position. RMB is a key reference point for regional valuations and policy constraints. RMB appreciated 4.4% in nominal terms in 2026, but excess capacity and deflationary forces roughly halved the adjustment in the real effective exchange rate. JPMorgan estimates that RMB remains approximately 12% undervalued, with much of the misalignment attributable to inflation differentials. The undervaluation continues to support China's trade surplus while increasing trade friction and geopolitical pressure for RMB appreciation. During multiple episodes of dollar strength this year, the People's Bank of China continued to use its fixing to signal almost one-way gradual appreciation. Corporates also increased their foreign-exchange conversion ratios, causing downward pressure on CNH to exceed the pace of appreciation implied by the fixing. With RMB still relatively cheap, the report believes that other Asian policymakers have an incentive to resist excessively rapid appreciation of their currencies, particularly the overvalued THB and SGD, making both suitable funding currencies. The overvaluation of both currencies has begun to correct this year: THB has adjusted more through nominal exchange-rate changes, while SGD has benefited from a cyclical surge in productivity. SGD's elevated valuation may also explain the Monetary Authority of Singapore's gradual policy approach, including its decision not to recenter the policy band upward as it normally might when energy prices surged in April. By contrast, TWD has fallen to historically excessively cheap levels amid strong economic growth, supporting tighter policy through both exchange rates and interest rates. The report maintains its bullish TWD view and pays five-year TWD non-deliverable interest-rate swaps. Recent valuations of KRW and MYR have moved closer to fair value, potentially reducing subsequent policy bias. If the dollar strengthens again, the report still favors expressing its KRW view from the short side. Finally, the K-shaped divergence in the regional recovery creates a new Dutch disease risk. AI construction is capital-intensive, and its benefits are concentrated in a limited number of industries and groups. South Korea, Taiwan, and Singapore face political pressure to redistribute the gains through subsidies or cash payments. Saving has become more politically difficult, but if the gains are used for short-term consumption, rising domestic prices could still drive real effective exchange-rate appreciation and erode competitiveness even if nominal exchange rates remain stable. The report therefore emphasizes prioritizing productivity-enhancing fiscal spending and long-term investment when deploying AI gains, as only productivity improvements can fundamentally support higher long-term exchange-rate valuations.

Analysis framework

The report first measures the scale of U.S. investment in AI equipment and intellectual property and its boost to Asian exports, then uses current accounts, financial accounts, and nominal effective exchange rates to test whether export gains translate into currency appreciation. It subsequently compares surplus-recycling mechanisms, capital-account openness, and supply-chain value capture through institutional and industrial case studies of Taiwan, Singapore, South Korea, Malaysia, and Thailand. Finally, it measures misalignments in RMB and other Asian currencies using real effective exchange-rate valuations explained by productivity differentials, combining policy bias, valuation, and capital flows into relative FX views.

Methodology notes

• Macroeconomic framework

  Dutch disease analysis

  The report uses the mechanism of “an external surplus generated by a booming industry—appreciation of the domestic currency or domestic prices—declining competitiveness in other tradable sectors” to analyze how AI and tourism revenue could damage manufacturing, while discussing the buffering role of savings or productivity-enhancing investment.

• Sector/industry analysis frameworkUpstream, midstream, and downstream industry-chain transmission

  Comparison of value capture across the semiconductor supply chain

  The report distinguishes South Korea's and Taiwan's memory-chip and advanced-manufacturing segments from Malaysia's assembly, testing, and packaging segments, explaining why the same AI demand generates different export values, service income, and foreign-exchange inflows.

• Macroeconomic framework

  Balance-of-payments surplus-recycling mechanism

  The report matches current-account surpluses with outflows through foreign-exchange reserves, sovereign wealth funds, insurance capital, pension funds, and private portfolio investment to determine whether export gains remain domestically and push up the exchange rate or are redirected overseas through the financial account.

• Macroeconomic framework

  REER valuation regression based on productivity differentials

  The report compares real effective exchange rates with relative productivity differentials, using the degree of deviation to determine whether currencies such as RMB, THB, SGD, and TWD are overvalued or undervalued and to analyze policymakers' incentives to resist appreciation or tighten policy.

• Event-driven strategy and behavioral financeEvent-driven analysis

  Policy-regime stress testing and reaction functions

  The report observes actual central-bank intervention during events such as TWD's three-day surge in 2025, changes in energy prices, and shifts between dollar strength and weakness to determine whether policy bands are robust and whether intervention is asymmetric between appreciation and depreciation.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• SGD/TWD

  JPMorgan maintains its short SGD/TWD position, arguing that policy bands in Singapore and Taiwan constrain the two sides of the trade, respectively.

  Strengths

  Both economies have institutionalized surplus-recycling mechanisms and relatively clear policy anchors.

  Weaknesses

  Forward curves and NEERs may be distorted by regulation and intervention.

  Comparison

  SGD is overvalued, while TWD has reached historically cheap levels amid strong growth.

  Risks

  Changes to central-bank policy bands, liquidity arrangements, or regulatory guidance could weaken the relative-value rationale.

• TWD

  The report maintains a bullish TWD view and pays five-year TWD NDIRS, arguing that the currency is excessively cheap and may require tighter exchange-rate and interest-rate policy.

  Strengths

  Taiwan occupies high-value segments of the AI and advanced-semiconductor supply chain, and its net international investment position exceeds 200% of GDP.

  Weaknesses

  Overseas investment by life insurers and regulatory guidance create persistent institutionalized capital outflows.

  Comparison

  Compared with the overvalued SGD and THB, TWD has shifted to the historically cheap side.

  Risks

  Taiwan's central bank may continue to suppress appreciation or adjust capital-flow regulations again.

• SGD

  The report continues to view SGD as a bearish funding currency and holds a short position in SGD/TWD.

  Strengths

  Singapore has a mature mechanism for recycling surpluses through sovereign funds, while productivity has improved cyclically.

  Weaknesses

  SGD remains overvalued, and the Monetary Authority of Singapore absorbs capital inflows through relatively low interest rates and liquidity injections.

  Comparison

  Compared with TWD, SGD is more expensive and policy is also more gradual.

  Risks

  If imported inflation causes the Monetary Authority of Singapore to accelerate S$NEER appreciation again, short SGD positions could come under pressure.

• KRW

  If the dollar strengthens again, the report favors expressing its KRW view from the short side.

  Strengths

  South Korea captures substantial industrial value because AI construction is highly memory-chip-intensive.

  Weaknesses

  The financial account is highly open, and flows involving pension funds, retail investors, and foreign portfolio investors continue to offset current-account gains.

  Comparison

  South Korea captures more semiconductor value than Malaysia, but its capital account is also more open, weakening the transmission of AI gains to KRW.

  Risks

  Tax-related repatriation or renewed foreign allocations to Korean equities could drive periodic KRW strength.

• MYR

  The report continues to favor going long MYR in a weak-dollar environment, arguing that it has asymmetric sensitivity to the dollar.

  Strengths

  Capital outflows are relatively tightly constrained, the ICT services balance is improving, and additional data-center capacity remains to be commissioned.

  Weaknesses

  Value capture is lower in assembly, testing, and packaging, while improvements in electronics trade have not yet fully translated into current-account gains and foreign-exchange conversion inflows.

  Comparison

  MYR has lower depreciation elasticity during dollar strength than KRW, whose financial account is more open.

  Risks

  Dividend remittances generated by foreign-direct-investment projects could offset incremental current-account gains from data centers and ICT services.

• THB

  The report still believes THB should be underweighted over the long term, but it has reduced the current underweight because of crowded positioning and the Bank of Thailand's reaction function.

  Strengths

  The Bank of Thailand tends to resist THB depreciation actively, providing periodic policy support for the currency.

  Weaknesses

  THB is approximately 8% overvalued, while tourism-driven Dutch disease, weak investment, and ineffective surplus recycling have damaged manufacturing competitiveness.

  Comparison

  THB and SGD are both viewed as overvalued funding currencies, but the Bank of Thailand's intervention is more asymmetric.

  Risks

  A reversal in the dollar, continued resistance by the Bank of Thailand to THB weakness, and crowded short positioning could all cause a rebound.

• RMB/CNY/CNH

  The report believes RMB remains cheap after appreciating in 2026, but policy will maintain gradual appreciation rather than rapid revaluation.

  Strengths

  Undervaluation and increased corporate foreign-exchange conversion support RMB, while the People's Bank of China's fixing continues to signal appreciation.

  Weaknesses

  Excess capacity and deflationary forces limit adjustment in the real effective exchange rate.

  Comparison

  RMB's approximately 12% undervaluation makes it harder for more highly valued Asian currencies such as THB and SGD to secure policy tolerance for rapid appreciation.

  Risks

  Trade friction and geopolitical pressure could increase pressure for RMB appreciation and affect regional policy choices.

Key data

• Growth in relevant U.S. AI investment components6.6% since 2025Above the sub-3% average of the preceding decade
• First-quarter growth in relevant investment8.9% saarAnnualized quarter-on-quarter growth, driving a surge in chip demand and Asian exports
• Taiwan's net international investment positionAveraged more than 200% of GDPRecent level, driven mainly by local life insurers' accumulation of overseas assets
• Reference range for the TWD policy corridorApproximately 5% above and below the three-year moving averageThe implicit dynamic stability corridor illustrated in the report
• 2025 TWD stress testNEER rose 10% in three trading days, then depreciated 10%The report uses this to conclude that Taiwan's central-bank regime came under pressure but did not break down
• South Korean portfolio investment outflowsMore than US$100 billion year-to-dateForeign investors took profits because of concentration limits on holdings in memory-chip companies
• Malaysia's current accountApproximately 1.5% of GDPThe current account remained stable despite an improvement in the electronics balance equivalent to 10% of GDP
• Improvement in Malaysia's ICT services balanceIncreased by 0.5% of GDP since 2022The report views this as a more important source of value capture from technology services
• Share of Malaysia's data-center capacity in operation20%The commissioning of remaining capacity could alter the current account over the next several years
• Thailand's GDP-path shortfall relative to pre-pandemic levelsApproximately 10%Manufacturing and tourism together explain more than half of the shortfall
• Thailand's investment growthOnly half the pre-pandemic rate from 2021 to 2024Weak investment widened the savings-investment gap and supported the current-account surplus
• THB valuation misalignmentApproximately 8% overvaluedThe misalignment is still considered significant even after a partial correction this year
• Crude-oil price during the Bank of Thailand observation periodApproximately US$70/barrelOil prices had declined in June and July, but the central bank's forceful resistance to THB depreciation persisted
• RMB nominal appreciation in 20264.4%Excess capacity and deflationary forces roughly halved the REER adjustment
• RMB valuation misalignmentApproximately 12%The report believes RMB remains cheap after its appreciation, with much of the misalignment attributable to inflation differentials

Impact & implications

The report argues that the impact of AI-driven export gains on Asian exchange rates depends primarily on how the proceeds are saved, reinvested, or exported through the financial account, rather than on export growth itself. Institutionalized surplus recycling can restrain excessive nominal appreciation, but a highly open capital account may also allow future gains to be realized in advance. If governments use the gains for consumption-oriented redistribution rather than productivity-enhancing investment, the real exchange rate may still appreciate through domestic inflation. Regional FX opportunities are therefore better assessed selectively based on policy bands, capital flows, and relative valuations rather than through a uniform bet on Asian currency appreciation.

Risks

• If AI gains are used for short-term consumption and fiscal redistribution, domestic inflation could drive real effective exchange-rate appreciation and erode manufacturing competitiveness.
• After the AI investment and chip-demand cycle ends, current-account gains may weaken, and an excessively strong exchange rate would amplify competitive pressure during the downturn.
• South Korea's highly open financial account may continue to generate large capital outflows, offsetting gains from memory chips and exports.
• Dividend remittances from Malaysia's data-center construction could offset improvements in the current account from ICT services, while the potential to generate further semiconductor and AI-service innovation remains uncertain.
• A reversal in the dollar, asymmetric intervention by the Bank of Thailand, and crowded positioning could put pressure on THB short positions.
• RMB undervaluation and China's trade surplus may continue to generate trade friction and geopolitical pressure for RMB appreciation.

What to watch

• Monitor U.S. investment in equipment and intellectual property, the memory-chip intensity of AI computing-capacity construction, and the resulting incremental boost to Asian exports.
• Track how Taiwanese life-insurance capital, Singaporean sovereign funds, South Korean pension funds, and portfolio investment flows recycle current-account surpluses.
• Watch for changes in Taiwan's central bank dynamic stability corridor, the Monetary Authority of Singapore's S$NEER band, and liquidity operations.
• Monitor whether foreign ownership concentration, portfolio investment outflows, and tax-related foreign-exchange repatriation in South Korea continue to affect KRW.
• Track the net impact of commissioning Malaysia's remaining data-center capacity, ICT service income, and dividend remittances.
• Monitor the stability of Thailand's civilian government, the recovery in investment, and regulatory measures targeting gray capital flows and gold trading.
• Watch dollar momentum and the Bank of Thailand's asymmetric intervention against THB appreciation and depreciation to determine when to restore the full THB underweight.
• Track the People's Bank of China's fixing, corporate foreign-exchange conversion ratios, and the pace at which RMB's REER misalignment converges.
• Monitor whether South Korea, Taiwan, and Singapore use AI gains for short-term subsidies or productivity-enhancing investment.