A currency-market ‘avalanche’ is heading for the U.S. dollar, and the tremors started this week
Story by Joseph Adinolfi, Marketwatch, 5/7/25
Investors have valid reasons to be concerned about wild swings in the global currency market over the past few days, according to one market veteran.
Since late 2022, Stephen Jen, chief executive and co-chief investment officer of Eurizon SLJ Capital, has been warning about the possibility that the U.S. dollar could be vulnerable to a sudden, disorderly depreciation, which he has likened to an “avalanche.”
Jen thinks that moment may have finally arrived. In a report shared with MarketWatch on Wednesday, Jen and co-author Joana Freire said that the sudden spike in the value of the Taiwan dollar and other Asian currencies could be a prelude to a bigger selloff in the greenback.
“We continue to believe the risks of investors being blind-sided by such a non-linear sell-off in the dollar continue to rise. The sharp sell-off in [the Taiwan dollar] last week is such an example. There will be others, we predict,” they said in the report.
In the view of Jen and Freire, changes in the geopolitical landscape, interest-rate spreads or other factors could inspire U.S. trading partners to start dumping the massive stores of dollars and dollar-denominated assets they have accumulated since the COVID-19 pandemic began in 2020.
They calculated that the pile of at-risk dollars held by China, Taiwan, Malaysia, Vietnam and other major Asian exporters has topped $2.5 trillion, a tally that has recently been rising by about $500 billion a year. Some of this money has been parked in liquid money-market instruments that aren’t included in data on international investment flows, Jen said.
The chart below shows the cumulative trade surpluses that major Asian exporters have accumulated with the U.S. since the start of 2020. It shows that the biggest “avalanche” risk for the dollar stems from Malaysia, Taiwan, Singapore, China and Vietnam.
If local exporters were to unload even a portion of their dollar holdings, it could cause the buck to weaken substantially. The risk is compounded by the fact that these market participants know the dollar is overvalued, Jen said, which could encourage them to cut and run if the greenback continues to weaken.
“The overhang of liquid dollar holdings is just too large if the dollar weakens, the Fed cuts interest rates, and China stages a cyclical rebound,” Jen and Freire said.
The Federal Reserve wasn’t expected to cut rates on Wednesday at the conclusion of its two-day policy meeting, but expectations have been growing for cuts totaling 75 basis points in 2025.
Another concern has been that President Donald Trump’s trade agenda could inspire foreign authorities to hold fewer dollars in reserve. Yet global dollar reserves held by foreign central banks have been falling for years, and investors have seen few signs so far that foreign investors have moved to meaningfully reduce their holdings of U.S. bonds.
Right now the biggest vulnerability, in Jen’s view, is China. Since the start of 2024, the People’s Bank of China has been closely managing the yuan, helping to keep its value against the dollar stable even as the greenback has weakened against most rivals. The ICE U.S. Dollar Index a gauge of the dollar’s value relative to major rivals like the euro, has fallen by more than 8% since the start of the year. The index was recently trading at 99.45, just above a three-year low reached last month.
Jen and Freire fear that a resumption of interest-rate cuts by the Fed, or an accusation of currency manipulation by the Treasury Department, could prompt Beijing to allow the yuan to appreciate. During the first Trump administration, Washington briefly labeled Beijing a currency manipulator before formally removing the designation in 2020. This could be the trigger that finally sets the avalanche in motion.
But as with an actual avalanche, predicting exactly what might set off the move would be extremely difficult. For now, Jen and his team said they can only watch and wait.
Jen previously ran currency research at Morgan Stanley, where he popularized the “dollar smile” theory. The theory argues that the greenback tends to appreciate when the U.S. economy is booming or when the global economy is struggling.
During the two days through Monday, the U.S. dollar weakened by more than 9% against the Taiwan dollar According to Dow Jones Market Data, this was the largest move on record for the currency pair going back to at least 2007. Other Asian currencies, like the South Korean won also surged, although those moves weren’t quite as dramatic.
Things were quieting down Wednesday, as the Taiwan dollar and other currencies eased off their highs. Still, their rapid and unexpected surge has revived speculation about whether foreign investors might be dumping dollar-denominated assets.
Not everybody has been as concerned as Jen and Freire. A team of analysts at Barclays said the move in the Taiwan dollar was likely already overdone and recommended that clients fade it. The analysts pushed back against the notion that dollar weakness could force Taiwanese life-insurance firms to dump their U.S. dollar-denominated holdings.
“Forced unwinds are unlikely, in our view, as lifers will look to avoid the realisation of losses — similar to 2022, when rises in U.S. interest rates had weighed on their USD bond investments,” the Barclays team said.
Of course, back then, the dollar was strengthening as U.S. interest rates shot higher, helping offset some of these investors’ portfolio losses in local-currency terms.
Treasury yields jumped on Friday, but one economist told MarketWatch that the selloff in the bond market likely had more to do with the strong April jobs report than any selling by Taiwanese investors. Bond yields rise as bond prices fall.
Analysts at Deutsche Bank appear to have uncovered some signs of selling. A new tracker developed by the team found that Taiwan ETFs dumped U.S. fixed-income assets on Monday.