By Joseph Adinolfi
A sudden increase in the Taiwan dollar could just be a taste of a disorderly depreciation that could be in store for the greenback, a market veteran warns
Investors have valid reasons to be concerned with wild oscillations on the world market for currencies in recent days, according to a market veteran.
Since the end of 2022, Stephen Jen, managing director and co-responsible for Eurizon SLJ Capital investments, has warned of the possibility that the US dollar could be vulnerable to a sudden and disorderly depreciation, which he compared to an “avalanche”.
Jen thinks that this moment may have finally arrived. In a report shared with Marketwatch on Wednesday, Jen and the co-author Joana Freire said that the sudden peak of the value of the Taiwan dollar and other Asian currencies could be a prelude to a greater sale in the greenback.
“We continue to believe that the risks that investors are blind by such a non-linear sale in the dollar continue to increase. Net sales (the Taiwan dollar) last week is such an example. There will be others, we predict,” they said in the report.
In the opinion of Jen and Freire, changes in the geopolitical landscape, interest rate differences or other factors could inspire American trade partners to start emptying the massive dollar stores and assets labeled in dollars that they have accumulated since the start of the COVVI-19 pandemic in 2020.
They calculated that the pile of dollars at risk owned by China, Taiwan, Malaysia, Vietnam and other large Asian exporters exceeded 2.5 billions of dollars, a count that recently increased by around $ 500 billion per year. Part of this money was parked in cash market instruments that are not included in international investment flow data, Jen said.
The graph below shows the cumulative trade surpluses that the main Asian exporters have accumulated with the United States since the beginning of 2020. It shows that the biggest risk “avalanche” for the dollar comes from Malaysia, Taiwan, Singapore, China and Vietnam.
If local exporters were to unload even part of their dollar assets, this could considerably weaken the mass. The risk is aggravated by the fact that these market players know that the dollar is overvalued, said Jen, which could encourage them to cut and run if the greenback continues to weaken.
“The overhanging of liquid dollars funds is simply too large if the dollar is weakening, that the Fed reduces interest rates and that China stages a cyclic rebound,” said Jen and Freire.
The federal reserve was not to reduce rates on Wednesday at the end of its two -day political meeting, but expectations increased for reductions totaling 75 base points in 2025.
Another concern is that President Donald Trump’s commercial program could inspire foreign authorities to have fewer dollars in reserve. However, the global reserves of the dollar held by foreign central banks have been decreasing for years, and investors have seen few signs so far that foreign investors have decided to significantly reduce their American bond assets.
Currently, the greatest vulnerability, according to Jen, is China. Since the beginning of 2024, the Banque Populaire de China has managed the Yuan closely, helping to maintain its value against the stable in dollars even if the greenback has weakened against most rivals. The Ice US Dollar Dxy index, a gauge of the value of the dollar compared to the main competitors such as the euro, has dropped more than 8% since the start of the year. The index was recently negotiated at 99.45, just above a three-year low year reached last month.
Jen and Freire fear that a resumption of interest rate reductions by the Fed, or an accusation of manipulation of currencies by the Treasury Department, could encourage Beijing to allow the Yuan to assess. During the first Trump administration, Washington briefly labeled Beijing a currency manipulator before officially deleting the designation in 2020. This could be the trigger that ultimately puts the avalanche in motion.
But as with a real avalanche, predicting exactly what could trigger the movement would be extremely difficult. For the moment, Jen and his team have said that they could only look and wait.
Jen had previously conducted foreign currency research in Morgan Stanley, where he popularized the theory of “dollar smile”. The theory argues that the greenback tends to appreciate when the American economy is booming or when the global economy is in difficulty.
During the two days to Monday, the US dollar weakened more than 9% compared to the Taiwan dollar (USDTWD). According to Dow Jones Market Data, it was the biggest decision for the pair of currencies which dates back at least 2007. Other Asian currencies, such as the South Korean Won (USDKRW), also increased, although these movements were not as dramatic.
Things calm down on Wednesday, while the Taiwan dollar and other currencies released their heights. However, their rapid and unexpected increase has rekindled speculation on the question of whether foreign investors could pour out assets denominated in dollars.
Not everyone was as worried as Jen and Freire. A team of barclays analysts said that the Taiwan dollar move was probably already exaggerated and recommended that customers buy it. Analysts have pushed the idea that the weakness of the dollar could force Taiwanese life insurance companies to throw their assets made in US dollars.
“Forced relaxes are unlikely, in our opinion, because life sentences will seek to avoid losses – similar to 2022, when increases in American interest rates had weighed on their USD bond investments,” said the Barclays team.
Of course, at the time, the dollar was strengthened as American interest rates fired above, helping to compensate for some of the portfolio losses of these investors in terms of local rise.
Treasury yields jumped on Friday, but an economist told Marketwatch that the sales market sale probably had more to do with the strong April job report than any sale by Taiwanese investors. Bond yields increase as the prices of bonds drop.
Deutsche Bank analysts seem to have discovered certain signs of sale. A new tracker developed by the team found that the ETF of Taiwan spilled us with fixed income assets on Monday.
-Joseph adinolfi
This content was created by Marketwatch, which is operated by Dow Jones & Co. Marketwatch is published independently of Dow Jones Newswires and the Wall Street Journal.
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05-07-25 1222 and
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