Stephen Jen and Joana Freire revisit their long-standing thesis of an “Avalanche Risk” facing the US dollar, this time highlighting the sudden surge in the Taiwan dollar (TWD) as a case study. The sharp 7.5% appreciation of TWD against the dollar in early May underscores the latent volatility stemming from enormous USD hoardings held across Asia. The authors estimate that Asian exporters and institutional investors may be sitting on as much as USD2.5 trillion in liquid dollar assets, with China alone accounting for the majority.
Since 2020, several Asian economies have run persistent trade surpluses, parking much of the proceeds in USD-denominated instruments rather than repatriating them. This has created a structural imbalance where any downward pressure on the dollar could trigger rapid liquidation of these positions, a phenomenon the authors have termed the “Avalanche Risk.”
The note emphasises that the recent USDTWD move may only be the beginning, with other Asian currencies poised to follow. If the Fed eases or China rebounds cyclically, the push-pull dynamics that kept dollar assets attractive may reverse, leading to a cascading sell-off in USDAsia. This risk is heightened by China’s apparent “opportunistic devaluation” of the CNY, keeping the nominal rate steady while allowing the effective exchange rate to depreciate.
Key Quote
“We have long warned about the ‘Avalanche’ risk for the dollar. There could be USD2.5 trillion worth of ‘snow’ in China and more from the likes of Taiwan, Malaysia, and Korea… Like in actual avalanches, ex-ante, many might dismiss the warnings, but ex-post, all would admit that it was an obvious risk.”
Table of Contents
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Summary
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The ‘Avalanche Risk’
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Some Asian currencies are well-positioned to rally
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China has been ‘managing’ USDCNY
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The Triffin Dilemma and the ‘Mar-a-Lago Accord’
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Bottom line
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