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Asian markets have recently provided a preview of a potential currency war under a second Trump administration. However, there is no immediate cause for alarm.
This week has been dramatic in typically calm markets. The Taiwanese dollar unexpectedly surged, increasing by 10 percent in two days, and remains up by 6 percent for the month. Additionally, the Hong Kong Monetary Authority intervened heavily to prevent its currency from appreciating too much against the US dollar. Speculators betting against Hong Kong’s long-standing currency peg may reemerge, despite previous failures.
The focus is primarily on the Taiwanese dollar due to significant dollar exposure by Taiwanese life insurers, about $700 billion with approximately a third unhedged. This has resulted in substantial paper losses.
The rapid appreciation of the Taiwanese currency is concerning. Sudden market movements often lead to significant losses and potential accidents. This situation may cause a self-fulfilling prophecy with Asian investors selling dollar holdings or hedging against risk, driving the dollar lower.
Stephen Jen of Eurizon SLJ Asset Management warned of the potential for a severe market downturn. Asian nations have amassed around $2.5 trillion in dollar reserves post-pandemic, posing an "avalanche risk."
Changes in macroeconomic conditions could trigger a sharp sell-off in the dollar, a risk that Jen feels is increasing. This scenario remains a possibility worth considering.
In context, Donald Trump aims to secure global trade deals, illustrated by a recent agreement with the UK. A weaker US dollar might alleviate some American trade concerns. However, there are indications the US administration might be moving away from a broad international agreement to weaken the dollar.
Currency movement speculation remains high, with potential tariff negotiations causing market unease. Speculators might react preemptively to any possible agreements.
UBS analyst Shahab Jalinoos suggests US-Asia trade deals might focus on vague commitments to higher interest rates and strengthened currencies, avoiding specific targets. Effective communication will be essential.
While currency wars are a risk, they remain unlikely. Recent market movements are largely orderly. The larger threats to the dollar stem from potential US geopolitical or policy missteps that could impact global confidence.
In conclusion, Asia is unlikely to trigger a financial mess; the US can still do that independently.
