A Currency-Market ‘Avalanche’ Is Heading For The U.S. Dollar, And The Tremors Started This Week
A Currency-Market ‘Avalanche’ Is Heading For The U.S. Dollar, And The Tremors Started This Week
Joseph Adinolfi Wed, May 7, 2025 MarketWatch
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.
https://www.yahoo.com/finance/news/currency-market-avalanche-heading-u-162200542.html