By Roushni Nair

(Reuters) – Bearish bets on the South Korean won and the Indian rupee soared to a two-year high as investors held onto their short positions in other currencies amid rising concerns about potential U.S. tariffs that could diminish the appeal of emerging market assets.

Short positions on the won increased to their highest level since mid-October 2022, while those on the Indian rupee spiked to their sharpest level since early November 2022, according to a Reuters poll of 11 respondents.

U.S. President-elect Donald Trump's threatened tariffs on China, Southeast Asia's largest trading partner, could trigger inflation, leading to a more cautious Federal Reserve and shallower U.S. rate cuts, potentially impacting emerging market currencies.

Bearish bets on the Chinese yuan slightly retreated as market expectations for stimulus support increased after a meeting of top Communist Party officials, who pledged to stabilize the country's property and stock markets.

Chinese officials are preparing to implement extraordinary economic measures, including a possible yuan weakening, to mitigate the anticipated higher trade tariffs under Trump, presenting another challenge for Asian currencies sensitive to the yuan due to trade ties.

"RMB will still be hit if Trump imposes tariffs. The uncertainty here is the timing, magnitude, and scope. But for now, daily CNY fixing pattern (below 7.20) suggests policymakers are likely to stick to their strategy to manage RMB expectations for now until any tariffs are implemented," said Christopher Wong, a currency strategist at OCBC.

In South Korea, the won dropped almost 2% last week as President Yoon Suk Yeol's brief declaration of martial law, followed by its reversal, led to political turmoil and hurt investor sentiment.

Concerns about U.S. tariffs and an unexpected interest rate cut by the Bank of Korea coincided with a 14-month slump in exports, highlighting fears of trade tensions and reduced U.S. demand.

"USD/KRW could continue to hover around 1,420 in the first half of 2025 amidst tariff risks and political uncertainty. However, we anticipate a gradual recovery in the second half as political noise diminishes, and Korea's growth could improve with an uptick in the semiconductor industry and lower rates," said Wei Liang Chang, a currency and credit strategist at DBS.

In India, the rupee reached record low levels three times last week, impacted by slowing economic growth, persistent foreign investment outflows, and the effects of volatile regional currencies, including the weakening Chinese yuan.

"Indian policymakers may continue to stabilize INR volatility, and we project USD/INR to gradually rise as the Reserve Bank of India (NS:BOI) rate cut is anticipated in February," said Chang.

Short bets on Thailand's baht eased significantly after last week revealed a 28% year-to-date increase in foreign tourist arrivals, along with another projected 4% growth in exports, both crucial for Southeast Asia's second-largest economy.

Bearish bets also decreased for the Indonesian rupiah, Malaysian ringgit, and the Philippine peso.

The Asian currency positioning poll analyzes what analysts and fund managers believe to be current market positions in nine Asian emerging market currencies: Chinese yuan, South Korean won, Singapore dollar, Indonesian rupiah, Taiwan dollar, Indian rupee, Philippine peso, Malaysian ringgit, and Thai baht.

The poll employs estimates of net long or short positions on a scale from -3 to +3. A score of +3 indicates that the market is significantly long on U.S. dollars.

The figures include positions held through non-deliverable forwards (NDFs).

The survey findings are depicted below (positions in U.S. dollar versus each currency):