A notable shift in Asia’s financial markets is casting a shadow over the U.S. dollar, as countries with significant trade surpluses begin to reconsider the long-standing habit of channeling their excess capital into American assets. This transformation is reflected in a recent wave of dollar selling across the region, starting with a record-setting rally in Taiwan’s currency and rapidly spreading to neighboring economies including Singapore, South Korea, Malaysia, China, and Hong Kong.
This trend is raising concerns among analysts who view the movement as a signal of broader capital realignment away from the U.S., potentially weakening one of the key supports for the greenback. After a dramatic two-day surge that saw the Taiwan dollar climb by 10 percent, Tuesday saw a pause in the momentum. Yet, pressure remained evident: Hong Kong’s currency tested the strong end of its exchange-rate band, and Singapore’s dollar hovered near its strongest point in over ten years.
Louis-Vincent Gave, co-founder of Gavekal Research, described the situation with a striking historical comparison. “To me, it has a very sort of Asian-crisis-in-reverse feel to it,” he said in a podcast, referencing the sharp and sudden nature of the currency movements. During the 1997-1998 Asian financial crisis, capital fled the region, collapsing local currencies. In response, many Asian economies resolved to accumulate U.S. dollars, primarily by investing in Treasury bonds.
Gave elaborated on the shift now unfolding. “Since the Asian crisis, Asian savings have not only been massive, but they’ve had this tendency to be redeployed into U.S. Treasuries. And now, all of a sudden, that trade no longer looks like the one-way slam dunk that it had been for so long,” he remarked.
In Taiwan, the dollar selloff was so intense that traders struggled to execute transactions effectively. Market participants suspect the central bank may have given at least silent approval to the selling spree. Meanwhile, similar scenes of heavy trading volumes have been reported in other Asian financial hubs.
The core driver behind the change, according to analysts, lies in the aggressive trade policies of U.S. President Donald Trump. His administration’s imposition of tariffs has shaken investor confidence in American financial instruments and disrupted traditional trade flows that once funneled surplus dollars into U.S. markets.
Exporters, particularly in China, are facing reduced revenues due to restricted access to U.S. consumers. Simultaneously, apprehension about a potential economic downturn in the United States is making its assets less appealing. “Trump’s policies have weakened the market’s confidence in the performance of U.S. dollar assets,” said Gary Ng, a senior economist at Natixis.
Some analysts are floating the idea of a so-called “Mar-a-Lago agreement,” a reference to Trump’s Florida resort, speculating whether there could be a tacit agreement aimed at weakening the dollar to bolster U.S. exports. However, Taiwan’s Office of Trade Negotiations has denied that foreign exchange matters were discussed during recent tariff discussions in Washington.
Behind the scenes, Asian economies hold vast amounts of dollar reserves. China, Taiwan, South Korea, and Singapore collectively possess dollar holdings in the trillions. In China alone, foreign currency deposits, primarily dollars held by exporters, reached $959.8 billion by the end of March, the highest level in nearly three years.
These reserves are often invested in global markets using currencies with relatively low borrowing costs. Institutions such as pension funds and insurance companies have traditionally preferred U.S. assets but often maintained minimal hedges due to the costs involved. That behavior now appears to be changing.
Financial firms are taking note. In a recent note, Goldman Sachs revealed that its clients had shifted their positions from betting against the Chinese yuan to betting in favor of it—effectively wagering against the U.S. dollar. Morgan Stanley’s chief China economist Robin Xing traced the start of the shift to April 2, the date of Trump’s latest tariff announcement, which he labeled “Liberation Day.”
“Over the mid- and long-term, I think people start thinking: how to diversify assets in the future, rather than be stuck in the outdated mentality of dollar supremacy,” said Xing.
A previously popular trade involving the U.S. dollar—capitalizing on the stable exchange rate of the Hong Kong dollar through the forwards market—has now begun to unravel. This strategy, once dubbed the “gift that never stopped giving,” relied on the assumption that the Hong Kong dollar would remain steady. But as currency markets shift, that belief is being shaken.
“Macro funds and leveraged players have hundreds of billions of dollars in the HKD forwards free-money trade, and now they are unwinding,” explained Mukesh Dave, chief investment officer at Aravali Asset Management, a global arbitrage fund based in Singapore.
Even Hong Kong’s monetary authority appears to be moving cautiously. It announced on Monday that it is trimming its exposure to U.S. Treasuries and diversifying its portfolio by adding more non-U.S. currency assets.
There is also increasing evidence of repatriation, with money returning to Asia’s bond markets. This development suggests that not only are investors reducing their exposure to the U.S. dollar, but some long-term capital—such as that held by exporters and institutional investors—is returning home.
“Repatriation talk is becoming reality,” said Parisha Saimbi, Asia-Pacific rates and FX strategist at BNP Paribas in Singapore. She noted that investors and exporters are either reducing their dollar holdings or scrambling to hedge against further losses. “Whichever format it comes in, it suggests that the support for the dollar is shifting and it’s turning lower … I think it speaks to this idea that there is a de-dollarization in action.”
According to UBS, if Taiwanese insurance firms were to increase their foreign exchange hedging ratios to match the average levels seen between 2017 and 2021, it could result in as much as $70 billion in U.S. dollar selling.
Despite this shift, Taiwan’s central bank has pledged to stabilize its currency. In a highly unusual move, the island’s president even issued a video statement asserting that the foreign exchange rate had not been part of recent U.S. trade negotiations.
Still, market behavior suggests otherwise. Investors appear to be moving away from the U.S. dollar regardless of official statements or reassurances. “USD/TWD is a canary in the coal mine,” said Brent Donnelly, a veteran trader and president at Spectra Markets. “Asian demand for U.S. dollars and Asian central bank desire to support the U.S. dollar is waning.”
A stylized fact following the 2008 crisis is that U.S. growth substantially outperformed the rest of the advanced world. This again looks to be true in the aftermath of COVID-19 (Figure 1), with lots of debate on the underlying drivers. Some argue that this outperformance reflects loose fiscal policy and rapid immigration, while others see a productivity boom linked to tight labor markets. Whatever the source, cyclical outperformance may keep U.S. inflation stickier than elsewhere. There are some signs of this. Figure 2 shows the combined weight of items in the U.S. consumer price index (CPI) with month-over-month inflation above 2% (on a seasonally adjusted, annualized basis), alongside the same measure for the eurozone’s harmonized index of consumer prices (HICP). This metric is noisier than if we used year-over-year inflation, but it has the advantage of focusing on recent inflation dynamics, since there are no base effects to muddy the picture. Elevated inflation remains relatively broad-based in the U.S., consistent with strong growth, while inflation momentum is clearly fading in the eurozone.
