Imagine the Asia-Pacific region as a Venn diagram of two overlapping circles, one circle representing China and one the United States. Where the two circles overlap are the other countries in the region, economically exposed to both China and the US and left facing monetary policy dilemmas when the Chinese and US central banks are following divergent trajectories. From a currency market perspective, this scenario spells opportunity. The foreign exchanges are adept at reflecting changing circumstances and identifying value. In the Asia-Pacific, a combination of rising commodity and food prices at a time when China’s continuing adherence to a zero-tolerance approach to Covid-19 is helping shape a monetary policy trajectory in Beijing that stands in sharp contrast to that of the US. This complicates policymaking, but the foreign exchanges will nevertheless look to identify currency winners and losers. Outside Japan, which has sought to eliminate a deflationary mindset for decades, higher inflation derived from rising commodity and food prices is usually perceived as bad news for consuming nations, though less so for economies where commodity and food exports are materially important. As it is, the Bank of Japan is sticking resolutely with ultra-accommodative monetary policy settings, attempting to craft conditions in which a degree of moderate but sustained price inflation will materialise. This stance arguably favours the use of the Japanese yen as a funding currency against other currencies that are considered to have room to strengthen. In China, while continuing efforts to contain Covid-19 mean the Chinese economy is not firing on all cylinders, and while the People’s Bank of China still has more room to ease monetary policy, the China-Japan yield differential still favours China’s yuan over the yen. If buying the yuan and selling the yen is a narrative that doesn’t attract but the logic of using the yen as a funding currency is persuasive, then the foreign exchange markets might focus instead on the Australian and New Zealand dollars. These are two Asia-Pacific currencies whose economies are benefiting from being exporters of currently sought-after commodity and food products and whose central banks are both in tightening mode. At the same time, the change in policy direction at the US Federal Reserve has been so dramatic that the currency markets must keep one eye on what the Fed is doing, or is intimating that it will do, to lower the rate of increase in US consumer price inflation. No one should underestimate the importance of the change in view at the Fed. Federal Reserve policymakers, who long saw higher US inflation as “ transitory ”, have now gone through a metamorphosis from cooing policy doves into sharp-taloned hawks. The Fed is now not only mapping out a succession of US rate increases, it might also opt for quantitative tightening, shrinking the size of its balance sheet earlier than markets had previously envisaged. In the near term, such a tightening of US financial conditions could support the broad value of the US dollar on the foreign exchanges. However, this situation, especially when China’s own current economic circumstances lend themselves to supportive monetary policy , leaves many Asia-Pacific policymakers with a dilemma, though not in Hong Kong. Why Asian central banks aren’t likely to turn as hawkish as the Fed In Hong Kong itself, the nature of the Linked Exchange Rate System , which is designed to ensure the Hong Kong dollar always stays between HK$7.75 and HK$7.85 to the US dollar, essentially requires the Hong Kong Monetary Authority to adjust interest rates in tandem with the Fed. Institutions such as the Bank of Korea, the Monetary Authority of Singapore and Taiwan’s central bank have already decided that circumstances call for some degree of tighter policy. Other central banks – such as those of India, Indonesia, Malaysia and Thailand – are either edging towards tightening monetary policy or are consciously holding back, still feeling inflationary pressures will abate naturally. Thailand is in the latter camp. Pandemic restrictions on Chinese citizens’ ability to travel abroad have hit Thailand’s tourism industry hard. Consequently, the Thai central bank is mindful that, even as the risk of higher inflation is not negligible, there is also a monetary obligation to support economic growth. With US interest rates rising, the currency markets might conclude this leaves the baht somewhat exposed. Differing economic priorities in Beijing and Washington have resulted in divergent Chinese and US monetary policy trajectories. Combined with more general concerns about rising inflation in many locales, this complicates decision-making for other Asia-Pacific policymakers, but it also spells opportunity for the currency markets. Neal Kimberley is a commentator on macroeconomics and financial markets