In a week of tributes to investor Warren Buffett, here is one from me, in the form of stealing one of his best aphorisms: Only when the tide goes out do you discover who has been swimming naked. The currency market is getting a view of that just as traders question the dollar’s dominance and whether the greenback is in a structural decline. Taiwan is among the first left exposed. The New Taiwan dollar rose as much as 5 percent against the US currency on Monday, the most since 1988, and has rallied about 8 percent this year.
Fingers have pointed to idiosyncratic factors, such as thin market liquidity and speculation that Washington asked the nation to lift the value of its currency as part of a trade deal, which authorities have denied. Traders might have been spooked by South Korea’s acknowledgement in late April that the exchange rate was one of the four major items to be discussed in future trade talks with the White House. It is also no secret that US President Donald Trump wants a weaker US dollar.
As Asians liquidate their US dollar assets and repatriate the proceeds, the unwind could be chaotic. However, that the NT dollar extended its rally despite the central bank’s strenuous effort to calm markets points to something more structural.
Wealthy, export-oriented Taiwan, for one thing, is engaged in a massive carry trade. In recent years, the domestic life insurance industry, a big business that is estimated to hold assets equivalent to 140 percent of GDP, found that it could profitably borrow locally and shovel the proceeds into US dollars.
At their peak, insurers were buying more than US$50 billion in US assets a year, according to the Financial Times.
Life insurance companies invest close to 70 percent of their money in foreign assets, but 83 percent of their funding is in the NT dollar, according to Bank of America Merrill Lynch. Meanwhile, their exchange rate risks are not fully hedged, averaging only 65 percent in the fourth quarter. As a result of that currency mismatch, when the greenback weakens — or the world believes that the White House means business — insurers have no choice but to raise their foreign-exchange hedge. In essence, they have to swap the US dollar out, putting it under further downward pressure.
Taiwanese life insurers are by no means the only ones swimming naked. Foreign investors from G10 countries alone have about US$13.7 trillion in unhedged US assets, UBS Group AG estimated. Global asset managers are also exposed, because of their long-held belief in US exceptionalism and a strong US dollar, which Trump is inadvertently breaking along with the global trade order.
Asian nations, in particular, are offering the first look at an ugly carry trade unwind. Just like Taiwan, they are export oriented and have hoarded a lot of US dollars. The Hong Kong Monetary Authority, for instance, is spending an unprecedented HK$60.5 billion (US$7.78 billion) to purchase US currency to defend its peg. Central banks with a big savings glut, such as South Korea, Singapore and Malaysia, might also need to scramble to avoid the sudden and violent appreciation of their currencies.
Indeed, there is a lot of selling pressure in Asia.
A Bloomberg survey of 18 Chinese exporters showed that they were worried about keeping the US dollar and have converted their holdings into yuan. Gold’s improbable rally this year, especially during Asia’s trading hours, further showcases how nervous people are toward the US currency. You cannot blame them.
In a paper published in November last year, US Council of Economic Advisers Chair Stephen Miran mentioned dollar “overvaluation” 10 times.
As the NT dollar’s outsized moves show, the global foreign exchange market has become deeply unstable. Trump changes his tariff stance on a daily basis, but the damage is done. The great US dollar unwind has arrived. It is no longer precious, but pressured.
Shuli Ren is a Bloomberg Opinion columnist covering Asian markets. A former investment banker, she was a markets reporter for Barron’s. She is a CFA charterholder.
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