June 4, 2025 • 21 mins
The economic impact of US President Donald Trump’s tariffs has led to a rethink over the US dollar. After the “Liberation Day” tariffs were announced on April 2, global investors sold both US equities and the dollar, a rare event that raises concerns about the credibility of US Treasuries and the dollar itself. Moody’s downgrade of the US credit rating and the sharp appreciation of certain currencies, particularly the Taiwan dollar, against the greenback have further intensified the situation.
Are we entering a period of de-dollarization? What are the implications for the regions' central banks, corporations and financial institutions – many of which are major holders of US Treasuries? And which Asian currencies could outperform following this paradigm shift? Stephen Chiu, chief Asia FX and rates strategist for Bloomberg Intelligence discusses these issues with John Lee on the Asia Centric podcast.
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Speaker 1 (00:01):
US President Trump's tariff policies have had a profound impact
on global financial markets, but one of the most surprising
has been the sell off in the US dollar. Since
the president's inauguration, the US dollar has weakened by over
nine percent versus a basket of major currencies, as measured
by the DXY Index. What's also unique is that this
(00:24):
sell off has occurred during times of financial stress in
US equity and bond markets, leading some analyst to question
whether the currency is losing its safe haven status. This
fear was further exacerbated when Moody's downgraded the US credit
rating from triple A to double A one. Are we
entering into a period of d dollarization? What does this
(00:46):
mean for Asia's currencies? And what about the region's central banks,
companies and financial institutions, many of whom are the biggest
holders of US treasuries and are heavily exposed to FX risks.
Listening to Aga Centric from Bloomberg Intelligence. I'm John Lee
here in Hong Kong. Today we have a regular on
the show. He's my colleague Stephen Chu, Chief Asia FX
(01:10):
and Great Strategies for Bloomberg Intelligence. Stephen, welcome to.
Speaker 2 (01:14):
The show Hi, John, thanks for having me. Stephen.
Speaker 1 (01:18):
Are we entering into a period of d dollarization, Well,
I would.
Speaker 2 (01:23):
Say yes and no, because this period actually has started
up over ten years ago in twenty fourteen when Thursday's
Russia and Cremer incident, and apparently Russia has start to
offload their US treasuries and then followed by of course
China also start to reduce their holdings. So it has
started just at a very gradual pace. And what happened
(01:43):
this year, especially in April, I would say, is just
acceleration of it. And if you ask me, it's still
somewhat orderly. Of course, it's very rare that we saw
US dollar, US treasury, and US equities all setting off
at the same time. So it's very clear that market
had enough of the TI riff game. So they don't
want to care about the reciprocal tariff. They don't want
to wait for any trade trials or trade deal. They
(02:05):
just vote by action that they're questioning the credibility of
the US, the credibility of the dollar, and of course
the US Treasury. So I would say that's why, yes,
I know it has started before, it's accelerating, and whether
it's going to continue to accelerate really depends on what
the US administration does, so we're going to look forward
to that going forward.
Speaker 1 (02:24):
I want to just repeat what you said, and you
refer to the events in April. Now, when the US
announced reciprocal tariffs, the S and P five hundred sort
off by more than twelve percent. In the next few days,
blond yuods were also rising, but we had surprisingly the
US dollar sell off. Now has these things happened before.
Speaker 2 (02:44):
Yeah, at least memory search. I've been the futual about
fifteen years. I've probably never seen that. It's quite interesting
because if we drill down into the performances, so the
dollar weakness was very apparent against the major currencies, especially
the Euro and the end. So that tells you that
the market theme is about changing the view of which
(03:04):
currency is more credible as a reserve currency. So we
know when we look at the reserve currencies, there's the dollar,
there's a euro, Yen Stirling. Of course, Chinese un is
a very interesting one and market always lost to talk
about it, but practically speaking, the UN didn't really rally
right away, meaning that market at the end of the
day is still more comfortable with the uro and the yen,
(03:25):
the major currencies, and in fact Asian currencies didn't already
against the dollar. Some actually when weaker, especially the un
before really rallying towards the end of April and early May.
Speaker 1 (03:36):
So are we starting to see a change in the
paradigm of FX investing now? I know a lot of
FX strategists talk about this smile theory for the US.
Can you give us like an FX one O one?
What does this smile theory mean?
Speaker 2 (03:50):
Yeah? Sure, So it's a very that's very well known
in the fics community. So it's proposed by Stephen Lee
Jen in two thousand and one. It's a relationship between
the US dollar and the US economy, so very simple.
When the US economy is super strong or super weak,
we see a strong dollar. When it's super strong, we
have the fat hiking rates them from an interest rate
(04:11):
or carry perspective. So we saw a few years ago
after COVID, so the US dollar was super strong. However,
in the extreme end, when we have say a US recession,
a global recession, everybody cutting rates. It's a risk of
scenario and the dollar, of course, we all know that
it's really the top most credible reserve currency, at least
before this year. So we have a very strong dollar
(04:33):
at the extreme ends, and only in the middle, in
the middle of the smell, we have a weaker US
dollar because when the world is peaceful, then everybody used
the dollar as a funding currency to buy something else.
Speaker 1 (04:43):
Okay, so that's the dollar smile. Now, what's happening now.
Speaker 2 (04:48):
Yeah, I would propose, of course, there are some people
talking about it already, and we were one of the
early ones proposing this so called dollar frown theory. So
it's just the extreme opposite compared to a smell. So
what happens is when the US economy is super strong
or super weak, we'll see a weaker US dollar. The
rationale it's because of fiscal concerns. So when we look
(05:09):
at the extremements, when the US economy is super strong
and the fact cannot cut rates, just like what's happening now,
market will actually dealt whether the US government can refine
them as the debt at such a high cost, given
that the US really funded spending with foreign flows. When
that's in doubt, we saw what happened. US treasury is
selling off really since April to now, it's still going on. However,
(05:31):
in the other end, when we saw say a global recession,
a completely risk of scenario, the dollar is no longer
the top choice for safe haven. People will go to
eurog to yen, and go to gold, and gold will
be more sort of currency. Like during this juncture in
the middle, when everything is fine, when we have no
trade will the world is peaceful, then market may actually
(05:52):
step back a little bit in questioning the US dollar,
and we saw US dollar strengthening, which is why, as
an example, we saw when the news about the US
China trade tariff delay for ninety days came out, the
dollar did rebound for a bit.
Speaker 1 (06:06):
Asia Centric is produced by Bloomberg Intelligence, where more than
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(06:28):
If you like what you hear, don't forget to subscribe
and share. We had Moodies downgrade the US credit rating.
Was this a big issue in your view, not.
Speaker 2 (06:38):
Really, of course everybody talk about so it's no longer
the highest rating government dat but it doesn't matter because
eventually this is going to happen. And even if all
these rating agencies don't address the concern, every single market
player knows about the structural slash fiscal vulnerabilities in the US,
so it's just a matter of time to see a
proper reflection of that. So that's why after that move,
(07:00):
it's not really in use. But we saw the dollar
selling off again and the US treasuries as well.
Speaker 1 (07:05):
Okay, so it sounds like the US is slowly starting
to lose its safe haven asset status.
Speaker 2 (07:11):
Would you say, yes, definitely start losing, but from a
very high base and at a very gradual pace, because
if you ask me as an X trader, as a practitioner,
I know everybody want to get out of the US dollar,
but the reality is there not much to go to really,
like there's as much gold as you can buy, there's
only as much safe government assets out there beyond the
(07:32):
US treasuries. So I would say it will still be
a very gradual process, but at least it will continue
going forward.
Speaker 1 (07:38):
And that's why you mentioned gold. Now, is that why
gold price is a continuing to go up.
Speaker 2 (07:43):
Yeah, especially we know gold is priced in the US dollars,
so it's kind of like a mirror image. As long
as the dollar continues to weaken, we'll see record goal
price every now and then. And central banks are really
the ones that we want to follow. They are the
smart people, and they have been buying really since twenty
twenty two, or buying at a quicker pace right after
COVID because they saw what's coming. We saw a more
(08:05):
bivocated world with all inflation anchoring. The fat had to
rate to higher levels, but still not really dealing with
the inflation issue. So that's why emerging Markeuess central banks,
leading really by China, India and Turkey for example, they're
all buying gold because they see this dollar era coming
to be questions.
Speaker 1 (08:24):
And I know you don't cover it, but I know
you get this question all the time as well. Does
that same theory apply to cryptocurrencies.
Speaker 2 (08:30):
It's a little bit different because when we look back
in history, usually when gold play a currency role, it's before, during,
and after a major geopolitical incident, so namely the World
War was so the gold being a unit and accounts
storage of value and transaction. Being a transaction unit, it's
more credible like these days, like you still can't really
(08:51):
transact with cryptocurrency, So I would say cryptocurrency might be
a good choice if you have a portfolio that you
want to exploit a weaker used dollar, But I would
say goal to still play a larger role in this
D dollarization trend, at least a larger share, because, after all,
crypto it's also a price in US dollar. So if
you ask me, like, I'm no expert in crypto, but
I would say it's just a dollar derivative or dollar assets,
(09:14):
unlike gold.
Speaker 1 (09:15):
Okay, so we've talked about the US the D dollarization.
What does this all mean in terms of your forecards
for the US dollar as well as against Asian currencies.
Speaker 2 (09:27):
Yeah, so simply put, we're going to see a broad
weekending in the US dollar. But of course there are
different performances across major currencies, let alone Asian currencies, so
we have to look at fundamentals. When we look at Asia,
one reason why they didn't really rally before the majors
until later in April was that we saw that their
(09:47):
macro fundamentals were still quite vulnerable to the trade tar
riff because we know trade tar riff target China, targets
Vietnam like a lot of the Asian partners. So at
the end of the day, if we don't have a
trade deal and if the effective tarret still end up
higher than before the trade will, then that's going to
hurt their economies. And we know they are very growth
sensitive and capital flows into Asia. Really it's betting on
(10:11):
their growth. Therefore, even though in a weaker dollar backdrop,
even if Asian currencies rally, it's going to be more
gradual compared to the g tens. Now when we look
at little podcasts the risk of larger appreciation. We saw
what happened to the Taiwan dollar in early May, and
possibly to Korean one and even Japanese yen. But that's
for different matter. That's because of the nature of those
(10:32):
economy and also with other players like the life insurance
companies and pensions.
Speaker 1 (10:37):
And I wanted to talk about the Taiwan dollar in
a few minutes, but I wanted to draw back to
the beginning of this year. Now, I remember a lot
of FX strategists were saying that US tarists was supposed
to support the US dollar, and these developments are surprised.
Speaker 2 (10:53):
Not really now it did happen because market always priced
in development before it happened. And when we look at
the efics market pricing, it really started since late last year,
before the US presential election in November, and then all
the way until really early January, so that has been
priced in by the market. We saw stronger dollar across
(11:14):
the board across Asian currencies, and not until earlier this year,
and markets start to question whether that policy could really
work to the US. And also to a point also
thanks to the US President Donald Trump being so hardworking
and posting about new policies every day, especially on tariff.
So market, as we said earlier, might really be fed
up with that. So they just decide, Okay, we're going
(11:36):
to exploit your structural factors for the US. Usually it's
more a medium to the longer term, but market decided
they're going to bring it forward and treat it as
a short term driver. Therefore the dollar stopped strengthening and
start to weaken.
Speaker 1 (11:48):
Okay, let's talk about the tow one dollar, because it
had a big move was it in May? Its strengthened
by over seven percent over a few days. Now I
think it was up by over nine percent versus the
US dollar for the whole month. Tell us what happened
to the Taiwan dollar and why was the move so abrupt?
Speaker 2 (12:07):
Yeah, I think it was about over ten percent at
one point for the first two days until the central
banks step in. So what happened was quite clear. So
we know most of the Asian economies exporters, they are
the big players. But also we have to at least
from now on market we have to pay a lot
of attention to and other big players, which are the livers.
So livers are most prominent or dominant in Taiwan of
(12:29):
course Taiwan, and then we have self current japen Asulla.
Speaker 1 (12:32):
You're talking about life insurance life insurance companies.
Speaker 2 (12:34):
Yeah, so they have a lot of overseas investments just
because the local market weren't big enough to absorb, so
they don't have really a big logo born market. So
in Taiwan's case, given the amount of the life insurance policies,
they have to look for investments overseas, and clearly the
US market is really their major destination. So whether it's
(12:55):
US treasuries, and to some extent, of course, it's actually
they're more interested in the dollar credit with high yield,
so they have a lot of dollar assets holding overseas.
What happened was now we have no proof and we
don't know whether they have started selling the assets, but
if they sold market really starting to question about the
US status or the US dollar status, US treasury status,
(13:17):
then it makes sense for them to at least either
increase hatching or to sell the assets. So that was
what happened. They probably just try to hatch a little
bit of their dollar holding by they usually do it
through NDF so selling Dollar Tower and DF but probably
given that the market was so feen, especially I remember
it was a mainland China holiday, price actions got exaggerated
(13:38):
and then we saw a huge appreciation in the Taiwan dollars.
So that's what happened until the central bands step in.
Of course, now the tides has come a little bit,
but it doesn't change the fact that at least for Taiwan,
they're holding over seven hundred billion US dollar or foreign assets,
mostly in the US dollar. At some point they will
have to deal with it either they have to hatch
(13:58):
more of it, or they'll have to out it. In
either case, it's going to hurt the US dollar. Also,
one very popular ethics theme is market or at least
a taiwan Is players, they're trying to hash through other currencies.
It makes sense because everybody hashing dollar Taiwan has made
the hedge and cost so expensive. And now when we
look at the NDF, say three months or one month NDF,
(14:19):
the implied annualized hatching cost is double digit over ten percent.
That's crazy. So you pay ten percent to hash an
appreciation and as you suspension, it's not easy to have
a ten percent appreciation, So it's that expensive. So what
happened at least hearing from market people, some people hash
it through the current one. And also going forward, we
may look at other Asian currencies. A lot of the
(14:40):
Asian currencies will be looked in to be used as
a proxy to hatch. So oh in all, the end
game is pretty straforred. We're going to see stronger Asian
currencies as a whole against the US dollar.
Speaker 1 (14:50):
And do you think what happened to the Taiwan dollar
that rapid appreciation, do you think that could be a precursor.
Could this happen again to other currencies.
Speaker 2 (15:00):
It's going to be a precursor. Actually, what makes things
interesting is now it had the Taiwanese authorities attention, so
they're going to stop that from happening again, at least
in the near term. So everybody, whether it's on shore
Taiwanese players or even offshore players betting them to go
for more hedging. We will look for other Asian currencies.
The Korean one is one of the obvious one that
(15:20):
people like because of course we have the news about
US and South Korea talking about ethics during the trade negotiation.
So even from that perspective, the kourent one could have
some room for appreciation, and both economies export a lot
of tech products. We know about the smartphones, we know
about other semiconductors, so therefore kourent one is really one
(15:40):
of the no brainer as a proxy hetch. We also
had a look at other currencies. We go through the
correlation some of the interesting ones, including the taigbart and
the Malaysian ring its, so we'll look after those currencies
as well.
Speaker 1 (15:53):
Okay, and what about the japan currency the yen. Now
I noticed like Japan CPI rose by I think over
three point five percent in April, and I saw the
headline news it was highest amongst G seven countries. This
is quite unbelievable. See inflation's returning back to Japan. What
does this mean for the currency.
Speaker 2 (16:13):
To be honest, this is just a continuation of what
has happened over the last two years ore and a
half years. So Japan inflation, as you have mentioned, if
you look at it, say the headline inflation or the
core inflation, both of them on a year and year basis,
remains about three percent. And even the so called core inflation,
which is inflation excluding food and energy prices, it's also
(16:35):
about two percent. So we talk about the last decades,
we talk about Japan in deflation mode for many decades.
Now they're getting two to three percent inflation. So now
is the best window for them to normalize policy, which
is why we think they're going to keep hiking rates
at least till policy rates reach one percent. And more importantly,
they're going to keep doing quilty so quantitative tightening by
(16:57):
slowing their purchase of the jgbs. We know jgb's have
been a hot topic these days because of the yields,
especially in the longer end yells has risen quite a lot.
But if you look at what the Bank of Japan
has said, not the government, the Bank of Japan, they
are not really concerned. They said they will keep doing QT,
maybe with a little bit of a tweak, but the
direction will be the same. That tells you how committed
(17:19):
they are in terms of walking away from the JGB market,
because one problem or one development over the decades is
that BOJ now owns over half of the JGB market
and going forward that's not healthy. If they want to
have a healthier private investor driven JGB market, kind of
like the US Treasury, then they will have to lower
their dominance in the JGB market. And now, as we said,
(17:41):
it's really the best window for them to normalize.
Speaker 1 (17:44):
So you see higher JGB yields going forward.
Speaker 2 (17:47):
Higher, so even steeper curve bear stripening we think is
going to be the normal.
Speaker 1 (17:51):
Okay, now, Stephen, you're one of our most popular analysts
that Bloomberg Intelligence. You always have been, but recently, you know,
there's been even more interesting in e fics currencies. You
and I have been on overseas trips recently. What are
clients worried about right now.
Speaker 2 (18:08):
Well, kind of like what you ask about the Taiwan dollar. Well,
of course we talk to Taiwanese clients. We talked too
many clients, and most of them they're concerned about a
very strong local currency. Because we mentioned about exporters in particular,
and livers and a lot of the other investors, they
have a lot of dollar exposure, whether their trades are
denominated in the dollars or they have a lot of
dollar assets. So now we're really talking about US crisis
(18:32):
in the making in terms of dollar assets. When we
talk about the Asian financial crisis many many years ago,
it's always about dollar liabilities because of FX mismatch. The
risk was on the Asian economies back then, But now
the risk really lies with the US because it's a
dollar asset crisis. And yeah, as you said, we have
a lot of questions this year, and that's why we
are cading it, at least internally the year of the EFFCS.
(18:55):
Of course, we know EFX matters every day every year,
but going forward for the next year, for the next
few years, in the next decade, we think effects will
be increasingly important given what happened to the US dollar, and.
Speaker 1 (19:06):
This is particularly worrisome for a lot of especially North
Asian companies and countries, because they rely on exports.
Speaker 2 (19:13):
Yes, I mean like because we are really one of
the major funders of the US deficit over the years.
Of course, novice Asian economies especially has been accused of
undervaluing their currency, which is why the US administration always
goes after say South Korea for example. But however, the
fact is that we do fund their deficit. So at
(19:34):
the end of the day, we are the savers with
the current accountcor plus player. So now the risk is
really on us to sort of manage a soft lending
so to speak, for this dollar weakness.
Speaker 1 (19:45):
Okay, so Stephen, before I let you go, like you've
already sort of hinted about some of these currencies. But
in your story of Asian currencies appreciating, do you have
like one of two favorites of the next say, six
to twelve months.
Speaker 2 (19:59):
Yeah, if you ask me, Because the largest risk of
appreciation that the central bank will find it hard to oppose,
it's really Taiwan. So if you ask me, twan dollar
will always be there in your little bit of course,
one reason being like in my view, it's not going
to operate from over the next three to foremanths is
that central banks will try their best to control to
(20:19):
contain the appreciation, so therefore the proxy currencies will be
my favorite. I mentioned a little bit earlier, so South
Koreina one type out and Malaysian ring kits are probably
the ones that I like the most, being a Talwan
dollar proxy and also from their own perspective, we think
they could appreciate as well.
Speaker 1 (20:36):
Steven, I think that's a great way to finish the show.
Thanks again for coming on the Asia Centric Podcast.
Speaker 2 (20:42):
Thanks for having me.
Speaker 1 (20:43):
You've been listening to the Asia Centric Podcast from Bloomberg Intelligence.
I'm John Lee in Hong Kong. You can find all
our episodes on Apple Podcasts, Spotify or where you listen
and this podcast was also produced and edited by Clara Chen.
Thanks for listening and see you next week.
US President Trump's tariff policies have had a profound impact
on global financial markets, but one of the most surprising
has been the sell off in the US dollar. Since
the president's inauguration, the US dollar has weakened by over
nine percent versus a basket of major currencies, as measured
by the DXY Index. What's also unique is that this
(00:24):
sell off has occurred during times of financial stress in
US equity and bond markets, leading some analyst to question
whether the currency is losing its safe haven status. This
fear was further exacerbated when Moody's downgraded the US credit
rating from triple A to double A one. Are we
entering into a period of d dollarization? What does this
(00:46):
mean for Asia's currencies? And what about the region's central banks,
companies and financial institutions, many of whom are the biggest
holders of US treasuries and are heavily exposed to FX risks.
Listening to Aga Centric from Bloomberg Intelligence. I'm John Lee
here in Hong Kong. Today we have a regular on
the show. He's my colleague Stephen Chu, Chief Asia FX
(01:10):
and Great Strategies for Bloomberg Intelligence. Stephen, welcome to.
Speaker 2 (01:14):
The show Hi, John, thanks for having me. Stephen.
Speaker 1 (01:18):
Are we entering into a period of d dollarization, Well,
I would.
Speaker 2 (01:23):
Say yes and no, because this period actually has started
up over ten years ago in twenty fourteen when Thursday's
Russia and Cremer incident, and apparently Russia has start to
offload their US treasuries and then followed by of course
China also start to reduce their holdings. So it has
started just at a very gradual pace. And what happened
(01:43):
this year, especially in April, I would say, is just
acceleration of it. And if you ask me, it's still
somewhat orderly. Of course, it's very rare that we saw
US dollar, US treasury, and US equities all setting off
at the same time. So it's very clear that market
had enough of the TI riff game. So they don't
want to care about the reciprocal tariff. They don't want
to wait for any trade trials or trade deal. They
(02:05):
just vote by action that they're questioning the credibility of
the US, the credibility of the dollar, and of course
the US Treasury. So I would say that's why, yes,
I know it has started before, it's accelerating, and whether
it's going to continue to accelerate really depends on what
the US administration does, so we're going to look forward
to that going forward.
Speaker 1 (02:24):
I want to just repeat what you said, and you
refer to the events in April. Now, when the US
announced reciprocal tariffs, the S and P five hundred sort
off by more than twelve percent. In the next few days,
blond yuods were also rising, but we had surprisingly the
US dollar sell off. Now has these things happened before.
Speaker 2 (02:44):
Yeah, at least memory search. I've been the futual about
fifteen years. I've probably never seen that. It's quite interesting
because if we drill down into the performances, so the
dollar weakness was very apparent against the major currencies, especially
the Euro and the end. So that tells you that
the market theme is about changing the view of which
(03:04):
currency is more credible as a reserve currency. So we
know when we look at the reserve currencies, there's the dollar,
there's a euro, Yen Stirling. Of course, Chinese un is
a very interesting one and market always lost to talk
about it, but practically speaking, the UN didn't really rally
right away, meaning that market at the end of the
day is still more comfortable with the uro and the yen,
(03:25):
the major currencies, and in fact Asian currencies didn't already
against the dollar. Some actually when weaker, especially the un
before really rallying towards the end of April and early May.
Speaker 1 (03:36):
So are we starting to see a change in the
paradigm of FX investing now? I know a lot of
FX strategists talk about this smile theory for the US.
Can you give us like an FX one O one?
What does this smile theory mean?
Speaker 2 (03:50):
Yeah? Sure, So it's a very that's very well known
in the fics community. So it's proposed by Stephen Lee
Jen in two thousand and one. It's a relationship between
the US dollar and the US economy, so very simple.
When the US economy is super strong or super weak,
we see a strong dollar. When it's super strong, we
have the fat hiking rates them from an interest rate
(04:11):
or carry perspective. So we saw a few years ago
after COVID, so the US dollar was super strong. However,
in the extreme end, when we have say a US recession,
a global recession, everybody cutting rates. It's a risk of
scenario and the dollar, of course, we all know that
it's really the top most credible reserve currency, at least
before this year. So we have a very strong dollar
(04:33):
at the extreme ends, and only in the middle, in
the middle of the smell, we have a weaker US
dollar because when the world is peaceful, then everybody used
the dollar as a funding currency to buy something else.
Speaker 1 (04:43):
Okay, so that's the dollar smile. Now, what's happening now.
Speaker 2 (04:48):
Yeah, I would propose, of course, there are some people
talking about it already, and we were one of the
early ones proposing this so called dollar frown theory. So
it's just the extreme opposite compared to a smell. So
what happens is when the US economy is super strong
or super weak, we'll see a weaker US dollar. The
rationale it's because of fiscal concerns. So when we look
(05:09):
at the extremements, when the US economy is super strong
and the fact cannot cut rates, just like what's happening now,
market will actually dealt whether the US government can refine
them as the debt at such a high cost, given
that the US really funded spending with foreign flows. When
that's in doubt, we saw what happened. US treasury is
selling off really since April to now, it's still going on. However,
(05:31):
in the other end, when we saw say a global recession,
a completely risk of scenario, the dollar is no longer
the top choice for safe haven. People will go to
eurog to yen, and go to gold, and gold will
be more sort of currency. Like during this juncture in
the middle, when everything is fine, when we have no
trade will the world is peaceful, then market may actually
(05:52):
step back a little bit in questioning the US dollar,
and we saw US dollar strengthening, which is why, as
an example, we saw when the news about the US
China trade tariff delay for ninety days came out, the
dollar did rebound for a bit.
Speaker 1 (06:06):
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to bring you timely, world class research. Our coverage spans
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(06:28):
If you like what you hear, don't forget to subscribe
and share. We had Moodies downgrade the US credit rating.
Was this a big issue in your view, not.
Speaker 2 (06:38):
Really, of course everybody talk about so it's no longer
the highest rating government dat but it doesn't matter because
eventually this is going to happen. And even if all
these rating agencies don't address the concern, every single market
player knows about the structural slash fiscal vulnerabilities in the US,
so it's just a matter of time to see a
proper reflection of that. So that's why after that move,
(07:00):
it's not really in use. But we saw the dollar
selling off again and the US treasuries as well.
Speaker 1 (07:05):
Okay, so it sounds like the US is slowly starting
to lose its safe haven asset status.
Speaker 2 (07:11):
Would you say, yes, definitely start losing, but from a
very high base and at a very gradual pace, because
if you ask me as an X trader, as a practitioner,
I know everybody want to get out of the US dollar,
but the reality is there not much to go to really,
like there's as much gold as you can buy, there's
only as much safe government assets out there beyond the
(07:32):
US treasuries. So I would say it will still be
a very gradual process, but at least it will continue
going forward.
Speaker 1 (07:38):
And that's why you mentioned gold. Now, is that why
gold price is a continuing to go up.
Speaker 2 (07:43):
Yeah, especially we know gold is priced in the US dollars,
so it's kind of like a mirror image. As long
as the dollar continues to weaken, we'll see record goal
price every now and then. And central banks are really
the ones that we want to follow. They are the
smart people, and they have been buying really since twenty
twenty two, or buying at a quicker pace right after
COVID because they saw what's coming. We saw a more
(08:05):
bivocated world with all inflation anchoring. The fat had to
rate to higher levels, but still not really dealing with
the inflation issue. So that's why emerging Markeuess central banks,
leading really by China, India and Turkey for example, they're
all buying gold because they see this dollar era coming
to be questions.
Speaker 1 (08:24):
And I know you don't cover it, but I know
you get this question all the time as well. Does
that same theory apply to cryptocurrencies.
Speaker 2 (08:30):
It's a little bit different because when we look back
in history, usually when gold play a currency role, it's before, during,
and after a major geopolitical incident, so namely the World
War was so the gold being a unit and accounts
storage of value and transaction. Being a transaction unit, it's
more credible like these days, like you still can't really
(08:51):
transact with cryptocurrency, So I would say cryptocurrency might be
a good choice if you have a portfolio that you
want to exploit a weaker used dollar, But I would
say goal to still play a larger role in this
D dollarization trend, at least a larger share, because, after all,
crypto it's also a price in US dollar. So if
you ask me, like, I'm no expert in crypto, but
I would say it's just a dollar derivative or dollar assets,
(09:14):
unlike gold.
Speaker 1 (09:15):
Okay, so we've talked about the US the D dollarization.
What does this all mean in terms of your forecards
for the US dollar as well as against Asian currencies.
Speaker 2 (09:27):
Yeah, so simply put, we're going to see a broad
weekending in the US dollar. But of course there are
different performances across major currencies, let alone Asian currencies, so
we have to look at fundamentals. When we look at Asia,
one reason why they didn't really rally before the majors
until later in April was that we saw that their
(09:47):
macro fundamentals were still quite vulnerable to the trade tar
riff because we know trade tar riff target China, targets
Vietnam like a lot of the Asian partners. So at
the end of the day, if we don't have a
trade deal and if the effective tarret still end up
higher than before the trade will, then that's going to
hurt their economies. And we know they are very growth
sensitive and capital flows into Asia. Really it's betting on
(10:11):
their growth. Therefore, even though in a weaker dollar backdrop,
even if Asian currencies rally, it's going to be more
gradual compared to the g tens. Now when we look
at little podcasts the risk of larger appreciation. We saw
what happened to the Taiwan dollar in early May, and
possibly to Korean one and even Japanese yen. But that's
for different matter. That's because of the nature of those
(10:32):
economy and also with other players like the life insurance
companies and pensions.
Speaker 1 (10:37):
And I wanted to talk about the Taiwan dollar in
a few minutes, but I wanted to draw back to
the beginning of this year. Now, I remember a lot
of FX strategists were saying that US tarists was supposed
to support the US dollar, and these developments are surprised.
Speaker 2 (10:53):
Not really now it did happen because market always priced
in development before it happened. And when we look at
the efics market pricing, it really started since late last year,
before the US presential election in November, and then all
the way until really early January, so that has been
priced in by the market. We saw stronger dollar across
(11:14):
the board across Asian currencies, and not until earlier this year,
and markets start to question whether that policy could really
work to the US. And also to a point also
thanks to the US President Donald Trump being so hardworking
and posting about new policies every day, especially on tariff.
So market, as we said earlier, might really be fed
up with that. So they just decide, Okay, we're going
(11:36):
to exploit your structural factors for the US. Usually it's
more a medium to the longer term, but market decided
they're going to bring it forward and treat it as
a short term driver. Therefore the dollar stopped strengthening and
start to weaken.
Speaker 1 (11:48):
Okay, let's talk about the tow one dollar, because it
had a big move was it in May? Its strengthened
by over seven percent over a few days. Now I
think it was up by over nine percent versus the
US dollar for the whole month. Tell us what happened
to the Taiwan dollar and why was the move so abrupt?
Speaker 2 (12:07):
Yeah, I think it was about over ten percent at
one point for the first two days until the central
banks step in. So what happened was quite clear. So
we know most of the Asian economies exporters, they are
the big players. But also we have to at least
from now on market we have to pay a lot
of attention to and other big players, which are the livers.
So livers are most prominent or dominant in Taiwan of
(12:29):
course Taiwan, and then we have self current japen Asulla.
Speaker 1 (12:32):
You're talking about life insurance life insurance companies.
Speaker 2 (12:34):
Yeah, so they have a lot of overseas investments just
because the local market weren't big enough to absorb, so
they don't have really a big logo born market. So
in Taiwan's case, given the amount of the life insurance policies,
they have to look for investments overseas, and clearly the
US market is really their major destination. So whether it's
(12:55):
US treasuries, and to some extent, of course, it's actually
they're more interested in the dollar credit with high yield,
so they have a lot of dollar assets holding overseas.
What happened was now we have no proof and we
don't know whether they have started selling the assets, but
if they sold market really starting to question about the
US status or the US dollar status, US treasury status,
(13:17):
then it makes sense for them to at least either
increase hatching or to sell the assets. So that was
what happened. They probably just try to hatch a little
bit of their dollar holding by they usually do it
through NDF so selling Dollar Tower and DF but probably
given that the market was so feen, especially I remember
it was a mainland China holiday, price actions got exaggerated
(13:38):
and then we saw a huge appreciation in the Taiwan dollars.
So that's what happened until the central bands step in.
Of course, now the tides has come a little bit,
but it doesn't change the fact that at least for Taiwan,
they're holding over seven hundred billion US dollar or foreign assets,
mostly in the US dollar. At some point they will
have to deal with it either they have to hatch
(13:58):
more of it, or they'll have to out it. In
either case, it's going to hurt the US dollar. Also,
one very popular ethics theme is market or at least
a taiwan Is players, they're trying to hash through other currencies.
It makes sense because everybody hashing dollar Taiwan has made
the hedge and cost so expensive. And now when we
look at the NDF, say three months or one month NDF,
(14:19):
the implied annualized hatching cost is double digit over ten percent.
That's crazy. So you pay ten percent to hash an
appreciation and as you suspension, it's not easy to have
a ten percent appreciation, So it's that expensive. So what
happened at least hearing from market people, some people hash
it through the current one. And also going forward, we
may look at other Asian currencies. A lot of the
(14:40):
Asian currencies will be looked in to be used as
a proxy to hatch. So oh in all, the end
game is pretty straforred. We're going to see stronger Asian
currencies as a whole against the US dollar.
Speaker 1 (14:50):
And do you think what happened to the Taiwan dollar
that rapid appreciation, do you think that could be a precursor.
Could this happen again to other currencies.
Speaker 2 (15:00):
It's going to be a precursor. Actually, what makes things
interesting is now it had the Taiwanese authorities attention, so
they're going to stop that from happening again, at least
in the near term. So everybody, whether it's on shore
Taiwanese players or even offshore players betting them to go
for more hedging. We will look for other Asian currencies.
The Korean one is one of the obvious one that
(15:20):
people like because of course we have the news about
US and South Korea talking about ethics during the trade negotiation.
So even from that perspective, the kourent one could have
some room for appreciation, and both economies export a lot
of tech products. We know about the smartphones, we know
about other semiconductors, so therefore kourent one is really one
(15:40):
of the no brainer as a proxy hetch. We also
had a look at other currencies. We go through the
correlation some of the interesting ones, including the taigbart and
the Malaysian ring its, so we'll look after those currencies
as well.
Speaker 1 (15:53):
Okay, and what about the japan currency the yen. Now
I noticed like Japan CPI rose by I think over
three point five percent in April, and I saw the
headline news it was highest amongst G seven countries. This
is quite unbelievable. See inflation's returning back to Japan. What
does this mean for the currency.
Speaker 2 (16:13):
To be honest, this is just a continuation of what
has happened over the last two years ore and a
half years. So Japan inflation, as you have mentioned, if
you look at it, say the headline inflation or the
core inflation, both of them on a year and year basis,
remains about three percent. And even the so called core inflation,
which is inflation excluding food and energy prices, it's also
(16:35):
about two percent. So we talk about the last decades,
we talk about Japan in deflation mode for many decades.
Now they're getting two to three percent inflation. So now
is the best window for them to normalize policy, which
is why we think they're going to keep hiking rates
at least till policy rates reach one percent. And more importantly,
they're going to keep doing quilty so quantitative tightening by
(16:57):
slowing their purchase of the jgbs. We know jgb's have
been a hot topic these days because of the yields,
especially in the longer end yells has risen quite a lot.
But if you look at what the Bank of Japan
has said, not the government, the Bank of Japan, they
are not really concerned. They said they will keep doing QT,
maybe with a little bit of a tweak, but the
direction will be the same. That tells you how committed
(17:19):
they are in terms of walking away from the JGB market,
because one problem or one development over the decades is
that BOJ now owns over half of the JGB market
and going forward that's not healthy. If they want to
have a healthier private investor driven JGB market, kind of
like the US Treasury, then they will have to lower
their dominance in the JGB market. And now, as we said,
(17:41):
it's really the best window for them to normalize.
Speaker 1 (17:44):
So you see higher JGB yields going forward.
Speaker 2 (17:47):
Higher, so even steeper curve bear stripening we think is
going to be the normal.
Speaker 1 (17:51):
Okay, now, Stephen, you're one of our most popular analysts
that Bloomberg Intelligence. You always have been, but recently, you know,
there's been even more interesting in e fics currencies. You
and I have been on overseas trips recently. What are
clients worried about right now.
Speaker 2 (18:08):
Well, kind of like what you ask about the Taiwan dollar. Well,
of course we talk to Taiwanese clients. We talked too
many clients, and most of them they're concerned about a
very strong local currency. Because we mentioned about exporters in particular,
and livers and a lot of the other investors, they
have a lot of dollar exposure, whether their trades are
denominated in the dollars or they have a lot of
dollar assets. So now we're really talking about US crisis
(18:32):
in the making in terms of dollar assets. When we
talk about the Asian financial crisis many many years ago,
it's always about dollar liabilities because of FX mismatch. The
risk was on the Asian economies back then, But now
the risk really lies with the US because it's a
dollar asset crisis. And yeah, as you said, we have
a lot of questions this year, and that's why we
are cading it, at least internally the year of the EFFCS.
(18:55):
Of course, we know EFX matters every day every year,
but going forward for the next year, for the next
few years, in the next decade, we think effects will
be increasingly important given what happened to the US dollar, and.
Speaker 1 (19:06):
This is particularly worrisome for a lot of especially North
Asian companies and countries, because they rely on exports.
Speaker 2 (19:13):
Yes, I mean like because we are really one of
the major funders of the US deficit over the years.
Of course, novice Asian economies especially has been accused of
undervaluing their currency, which is why the US administration always
goes after say South Korea for example. But however, the
fact is that we do fund their deficit. So at
(19:34):
the end of the day, we are the savers with
the current accountcor plus player. So now the risk is
really on us to sort of manage a soft lending
so to speak, for this dollar weakness.
Speaker 1 (19:45):
Okay, so Stephen, before I let you go, like you've
already sort of hinted about some of these currencies. But
in your story of Asian currencies appreciating, do you have
like one of two favorites of the next say, six
to twelve months.
Speaker 2 (19:59):
Yeah, if you ask me, Because the largest risk of
appreciation that the central bank will find it hard to oppose,
it's really Taiwan. So if you ask me, twan dollar
will always be there in your little bit of course,
one reason being like in my view, it's not going
to operate from over the next three to foremanths is
that central banks will try their best to control to
(20:19):
contain the appreciation, so therefore the proxy currencies will be
my favorite. I mentioned a little bit earlier, so South
Koreina one type out and Malaysian ring kits are probably
the ones that I like the most, being a Talwan
dollar proxy and also from their own perspective, we think
they could appreciate as well.
Speaker 1 (20:36):
Steven, I think that's a great way to finish the show.
Thanks again for coming on the Asia Centric Podcast.
Speaker 2 (20:42):
Thanks for having me.
Speaker 1 (20:43):
You've been listening to the Asia Centric Podcast from Bloomberg Intelligence.
I'm John Lee in Hong Kong. You can find all
our episodes on Apple Podcasts, Spotify or where you listen
and this podcast was also produced and edited by Clara Chen.
Thanks for listening and see you next week.
Hosts And Creators
John Lee
Tom Corbett
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