Asian Investors May Unload $500 Billion in Dollars Adding Pressure on Currency

Skandinaviska Enskilda Banken AB predicts that Asian investors might sell as much as $500 billion worth of dollars next year, putting additional pressure on the currency.
These investors' stockpiles include deposits accumulated by Asian exporters, pension funds' over-allocations to dollar-denominated assets, and relatively low levels of foreign exchange hedging, noted strategists Namik Immelback and Dana Malas in a research report.
"In an aggressive scenario, there could be $400 billion to $500 billion in foreign exchange rebalancing," they stated. "Coupled with the U.S. theme of 'from exceptionalism to growth convergence,' the likelihood of this rebalancing further strengthens the view of a weaker dollar by 2025."
Bloomberg's dollar spot index has decreased nearly 3% since the end of June and is poised for its first quarterly decline this year as markets anticipate a Federal Reserve rate cut as early as its September policy meeting.
The strategists pointed out that Japanese and Taiwanese life insurers maintain relatively low hedge ratios, while Japan's Government Pension Investment Fund has allocated more to foreign bonds compared to 2018. They also noted an increase in foreign currency deposits across Asia, primarily in dollars.
According to financial results up to March 31 from Japan's nine largest life insurers, 47% of their foreign securities were protected with derivatives, mitigating losses from a stronger yen, the lowest proportion since September 2011.
SEB strategists also highlighted a long-term trend among Asian reserve management companies to diversify away from the dollar towards other currencies and gold. They noted that there might be a sustained strategic shift towards non-dollar investments.