Asia's Currencies Surge as Dollar Selling Spreads, 10% Gain in Taiwan

Asia's currencies have surged due to a wave of dollar selling, reminiscent of a "reverse Asian financial crisis." This trend, sparked by the New Taiwan dollar's record-breaking gains, has since spread to other regional currencies, including the Singapore dollar, South Korean won, Malaysian ringgit, Chinese yuan, and Hong Kong dollar. These movements signal a significant shift in capital flows, with substantial funds moving into Asia and challenging the dollar's traditional support.

Despite the New Taiwan dollar's dramatic 10% cumulative rise over two days, market conditions stabilized on Tuesday. However, the Hong Kong dollar is nearing the strong end of its linked exchange rate range, while the Singapore dollar has risen to levels not seen in over a decade. This rapid currency movement has drawn comparisons to the 1997-1998 Asian financial crisis, when capital flight led to severe currency depreciation across the region.

Louis-Vincent Gave, co-founder of Gavekal Research, noted the speed of these currency movements, likening them to a "reverse Asian financial crisis." Since the 1997-1998 crisis, Asia has accumulated vast savings, traditionally reinvested in U.S. Treasuries. However, recent developments suggest this trend may be reversing, with investors questioning the long-term stability of dollar-denominated assets.

Traders in China Taiwan reported difficulties executing trades due to the one-sided selling of dollars, speculating that the central bank may have tacitly approved the move. Similar large trading volumes were observed in other Asian markets. Analysts attribute this shift to U.S. President Donald Trump's aggressive trade policies, which have eroded investor confidence in the dollar and disrupted the flow of trade dollars into U.S. assets.

Exporters, particularly from China, anticipate reduced earnings due to tariffs limiting market access. Additionally, concerns about a U.S. economic slowdown have cast a shadow over returns on U.S. assets. Gary Ng, senior economist at Natixis, noted that Trump's policies have weakened market confidence in dollar assets, with some speculating about a "Mar-a-Lago agreement" aimed at devaluing the dollar.

China Taiwan's trade negotiation office denied that recent trade talks in Washington involved currency issues. However, the region's substantial dollar reserves, totaling trillions, suggest a significant shift in sentiment. China's banks hold nearly $1 trillion in foreign currency deposits, primarily in dollars, with much of this held by exporters. This, combined with multi-layered investments and low borrowing costs, has traditionally supported the dollar.

Recent indicators show a change in this dynamic. Goldman Sachs reported that investors have shifted from shorting the Chinese yuan to going long, effectively shorting the dollar. In the Hong Kong dollar forward market, the popular "endless gift" trade of buying cheap dollars has reversed, as this trade relies on the Hong Kong dollar's stability. Mukesh Dave, chief investment officer at Aravali Asset Management, noted that macro funds and leveraged investors have exited these positions, potentially signaling a broader trend.

The Hong Kong Monetary Authority, the region's de facto central bank, has been reducing its holdings of long-dated U.S. Treasuries and diversifying its currency exposure. This, along with rising Asian bond markets, suggests that export earnings and long-only funds may be returning to the region. Parisha Saimbi, Asia-Pacific rates and FX strategist at BNP Paribas, observed that this capital repatriation is becoming a reality, indicating a weakening dollar and potential de-dollarization.

UBS estimates that if China Taiwan's insurance companies increase their hedging ratios to average 2017-2021 levels, they could sell around $700 billion in dollar assets. Despite China Taiwan's assurances of currency stability, market actions suggest otherwise. Brent Donnelly, president of Spectra Markets, described the dollar's performance against the New Taiwan dollar as a "canary in the coal mine," indicating waning Asian demand for the dollar and reduced central bank support.