Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2: Hey, it's Celia today on the show. We're bringing you
Speaker 2: an episode from my colleagues at Big Take Asia. It's
Speaker 2: on the dollar and what currency, if any, could take
Speaker 2: its place in global trade. And if you missed it,
Speaker 2: my interview with Stephen Myron, the White House's Chairman of
Speaker 2: Economic Advisors, where we talk about US currency and market volatility,
Speaker 2: is in the feed. Now here's the show.
Speaker 3: On a Friday afternoon earlier this month, Bloomberg's Ruth Caston
Speaker 3: was monitoring Asian markets and hoping for calm ahead of
Speaker 3: her weekend.
Speaker 1: Truth to be told, I was hoping for a very
Speaker 1: quiet Friday because it was a public holiday here in
Speaker 1: Singapore on Thursday. Baby boy, it definitely didn't end up
Speaker 1: that way for sure.
Speaker 3: Ruth covers the foreign exchange market from Singapore, and on
Speaker 3: that particular Friday, an Asian currency that rarely makes headlines
Speaker 3: started to search.
Speaker 1: The Taiwan dollar At around eleven thirty local time in Taipei.
Speaker 1: It jumped by about two percent, but it didn't just
Speaker 1: stop there. By the time markets had closed, the Taiwan
Speaker 1: dollar was up about three percent higher against the US
Speaker 1: currency to put things into perspective. It was the single
Speaker 1: largest one day advance since nineteen eighty eight. This is
Speaker 1: a normally incredibly sedate currency. Something had clearly blown up.
Speaker 3: The blow up put market watchers globally on high alert,
Speaker 3: and on Monday morning the surge continued. You're looking at
Speaker 3: the Taiwan dollar up against virtually everything and up substantially
Speaker 3: against every sing everything is done against a Taiwan don.
Speaker 1: I think that's the Taiwan dollar's move was so large
Speaker 1: that it was affecting, you know, peers in Asia. For instance,
Speaker 1: the Malaysian rinked rose more than one percent on Friday.
Speaker 1: On Monday again, boom, we saw another one percent move,
Speaker 1: The South Korean one jumped more than two percent at
Speaker 1: one stage, and then we saw Hong Kong authorities ramp
Speaker 1: up sales at a local dollar because the green back
Speaker 1: was just weakening. So it was a spiral effect and
Speaker 1: imagine a whirlpool just everything being sucked in.
Speaker 3: Eventually, the Taiwan dollar stabilized, but the spike underscored a
Speaker 3: much larger issue, d dollarization, a movement away from US
Speaker 3: assets as markets grapple, which shifts in US economic policy
Speaker 3: and Ruth stepping back, why is it such a big
Speaker 3: deal that Taiwan's dollar surged to these unprecedented levels.
Speaker 1: It was hugely disruptive on a lot of levels of
Speaker 1: the economy and also society. If you're a sophisticated investor
Speaker 1: and you're caught out on the wrong side of the trade,
Speaker 1: you would have seen huge losses. Because this is a
Speaker 1: normally state or currency. On an economic level, a surge
Speaker 1: of this magnitude can really impact exporters, traders, insurers, And
Speaker 1: this is coming at a time when the US was
Speaker 1: imposing tariffs right on most of the world and people
Speaker 1: are trying to digest that. So there would have been
Speaker 1: also people across markets that will be thinking about the
Speaker 1: other side of the trade, which is a dollar. The
Speaker 1: green bag is on eighty eight percent of all trades
Speaker 1: in the world, so dominant that every single trade yield,
Speaker 1: every single currency exchange, eighty eight percent of that every
Speaker 1: minute involves the dollar, and people started thinking, are we wrong?
Speaker 1: Did we get the dollar wrong here? And if so,
Speaker 1: maybe I should just really sell it and sell it against.
Speaker 3: What Welcome to the Big Take Asia from Bloomberg News
Speaker 3: Rebecca Cheung Wilkins. Every week we take you inside some
Speaker 3: of the world's biggest and most powerful economies and the markets, tycoons,
Speaker 3: and businesses that drive this ever shifting region. Today on
Speaker 3: the show, Asia's Dollar unwind are Asian nations rethinking their
Speaker 3: traditional approach of hoarding US dollars and what does this
Speaker 3: mean for the global economy as confidence in the dollar
Speaker 3: faces increasing scrutiny. For decades, the US dollar has been
Speaker 3: the world's dominant currency. It's deeply embedded in government, central banks,
Speaker 3: life insurers, and even your investment and retirement funds. That's
Speaker 3: unlikely to change for the time being. But what we
Speaker 3: saw happen with Taiwan's currency earlier this month is extremely significant.
Speaker 3: It shows the degree to which investors are looking for
Speaker 3: viable alternatives to the dollar.
Speaker 1: Unprompted a hedge fund manag told me this is a
Speaker 1: reverse Asian financial crisis we're seeing right now.
Speaker 3: Bloomberg's Ruth Carson says the spiral sparked fears that Taiwan's
Speaker 3: dollar search wasn't a one off event.
Speaker 1: What I found really profound was that soul searching people going,
Speaker 1: what if indeed this is the start of a domino
Speaker 1: effect and we see money instead of being sucked out
Speaker 1: of Asia, we see the opposite capital flows coming in
Speaker 1: because momentum right, And indeed we did see that in
Speaker 1: a way. Literally a week and a bit after the
Speaker 1: Taiwan dollar explosion, the South Korean one actually jumped two percent,
Speaker 1: another super sedate currency typically and the whole narrative just
Speaker 1: gained a lot more traction that Hey, we are at
Speaker 1: that point where this is nineteen ninety seven in reverse
Speaker 1: twenty twenty five style.
Speaker 3: In nineteen ninety seven, the Asian financial crisis began with
Speaker 3: the devaluation of Thailand's currency and quickly spread through the region.
Speaker 1: There was an over reliance on short term borrowings at
Speaker 1: the time by countries like Thailand and South Korea and
Speaker 1: all that. But the short and borrowings were not backed
Speaker 1: by dollar assets, and that in turn really triggered a
Speaker 1: debt crisis. There were very hard lessons learned of we
Speaker 1: need to ensure that we have a treasure chest of
Speaker 1: really strong, high quality desired assets like treasuries like the dollar,
Speaker 1: and make sure we don't get to the nineteen ninety
Speaker 1: seven repeat again. So that really led Asian nations to
Speaker 1: double down on earning dollars from exports to the US,
Speaker 1: building up surpluses that goes back to the treasure chest idea.
Speaker 3: Since nineteen ninety seven, the eleven biggest economies in Asia
Speaker 3: have collectively bought four point seven trillion dollars of US
Speaker 3: equities and bonds, which they reinvested right back into America.
Speaker 1: In the early two thousands, almost every dollar earned, for instance,
Speaker 1: by the large Asian exporters to America was reinvested back
Speaker 1: into its equities and bond markets, and Asian currencies have
Speaker 1: been as a result almost unvalued for decades.
Speaker 3: That tram peaked in two thousand and four and started
Speaker 3: tapering off as China's membership in the WTO reshaped investments
Speaker 3: in the region. The two thousand and eight financial crisis
Speaker 3: and last year's carried trade crisis in Japan also spooked
Speaker 3: investors into rebalancing their portfolios. Then Trump started his second term.
Speaker 1: So almost unanimously talking to people across markets. The message
Speaker 1: is that Donald Trump's trade war two point zero is
Speaker 1: only accelerating the process of de dollarization, which in a
Speaker 1: way is jargon for people turning away from the dollar
Speaker 1: and finding alternatives. That undisputedly is the theme across the
Speaker 1: seven point five trillion dollars a day currency market. It
Speaker 1: is definitely the theme driving this insatiable bid for gold,
Speaker 1: for instance, and also for just healthy alternatives. I mean,
Speaker 1: even arguments like bitcoin, you know, are coming into the equation.
Speaker 1: What can people do to find other stores of value
Speaker 1: other than the US dollar. We're hearing people say that
Speaker 1: markets are at an inflection point, We're witnessing the birth
Speaker 1: pains of a new regime. Others are saying this is
Speaker 1: just the beginning of the great unwind of US dollar
Speaker 1: hoarding and exceptionalism.
Speaker 3: And how are we seeing investors in Asia reacting to
Speaker 3: this idea of reverse capital flow? And if it is
Speaker 3: going back to Asia, where does the capital go?
Speaker 1: Japan's largest life insure, for instance, nip On Life. They
Speaker 1: are actively looking for alternatives to treasuries. This is a big,
Speaker 1: you know change in stands. The tide is turning after
Speaker 1: a multi degate trend that Titanic is turning. And don't
Speaker 1: forget China, China, which is so critical. Data from Treasury
Speaker 1: has shown that they've shrunk the treasury is holding in March.
Speaker 1: The question then is you're right, where does the capital go?
Speaker 1: It's going to gold, it's going to Europe, it's going
Speaker 1: to places like the Singapore dollar, Taiwan dollar. We've seen
Speaker 1: strength in Asian currency, so the drips and traps are
Speaker 1: coming home, but it does take time and people are
Speaker 1: still figuring out where that money will ultimately lead after
Speaker 1: the break.
Speaker 3: What a reframing of global financial markets means for Asia's economies.
Speaker 3: The recent surge in Taiwan's dollar came as a shock
Speaker 3: to investors, but the move globally towards Taiwan's currency doesn't
Speaker 3: exist in a vacuum. Figures released in late April showed
Speaker 3: strong economic growth in Taiwan in the first few months
Speaker 3: of twenty twenty five, and market watchers speculated that foreign
Speaker 3: exchange rates could be part of the ongoing trade negotiations
Speaker 3: between the US and major trade partners across Asia, including Taiwan.
Speaker 3: What does a stronger Taiwan dollar mean for people in Taiwan?
Speaker 3: Who does it benefit?
Speaker 1: Who does it hurt? So I think a good way
Speaker 1: to think about it would be to look at people
Speaker 1: in Taiwan and also outside Taiwan. It's good for people
Speaker 1: who are overseas and whole Taiwan's assets like real estate, shares,
Speaker 1: given that the value of their local assets of just
Speaker 1: can you ad you just searched six percent and you
Speaker 1: didn't have to do anything at all, just because of
Speaker 1: the currency move. But you know what if you are
Speaker 1: an exporter, I mean it's painful. All of a sudden,
Speaker 1: you have got a six percent hit.
Speaker 3: Take Taiwan's TSMC, the world's largest chip maker, as an example.
Speaker 3: It estimates that for every one percent appreciation in the
Speaker 3: Taiwan dollar, its operating margin declines by zero point four percent.
Speaker 3: Taiwan's life insurers, who are huge investors in US treasuries,
Speaker 3: also took a significant hit.
Speaker 1: If you're a local life insurer who have overseas assets
Speaker 1: predominantly in the US, and you are unhitched or unprepared
Speaker 1: for such sut of moves in a currency, it severely
Speaker 1: impacts the value of your investments in a very very
Speaker 1: short space of time. Gomman Sachs they put pen to
Speaker 1: paper and they did a calculation that a ten percent
Speaker 1: gain in the dollar, and this would will This could
Speaker 1: potentially also apply to other players in the market. But
Speaker 1: attemptsent gain and a Taiwan dollar could lead to eighteen
Speaker 1: billion dollars in unrealized currency loss for the insurers and
Speaker 1: that would effectively wipe out their capital reserves.
Speaker 3: Okay, so that's the impact on the day, But longer term,
Speaker 3: is a stronger Taiwan dollar is it good for Taiwan?
Speaker 1: So a stronger Taiwan dollar is great for local consumers
Speaker 1: in a sense that your import's become a lot cheaper.
Speaker 1: All of a sudden, your imported cheese has just gotten
Speaker 1: a lot cheaper. They have more spanding power as well,
Speaker 1: So if you think about it, you can go overseas,
Speaker 1: you can get a lot more bang for your buck.
Speaker 1: But if you're an exporter and this is entrenched, all
Speaker 1: of a sudden there is a regime shift and you
Speaker 1: are facing a stronger Taiwan dollar as your base case,
Speaker 1: you are going to be in a lot of pain.
Speaker 1: Taiwan is a major exporter, and we all know strong
Speaker 1: currencies not great for your p and l.
Speaker 3: Outside Taiwan, some of the world's biggest money managers are
Speaker 3: wary of how the unwinding of the US dollar could
Speaker 3: affect other Asian countries, especially those that have large trade
Speaker 3: surpluses with the US.
Speaker 1: There are indicators out there suggesting that Asian currencies are
Speaker 1: indeed severely undervalued, which puts this risk really at the
Speaker 1: forefront of things. On average, for example, major Asian currencies,
Speaker 1: including the yen and yuan, which are seen as two
Speaker 1: very anchor currencies and as part of the world, are
Speaker 1: fifty seven percent weaker than exchange rates that take into
Speaker 1: account differences in the cost of living. That's according to
Speaker 1: our calculations, and that's close to an all time historic
Speaker 1: low of fifty nine percent it was set in twenty
Speaker 1: twenty four.
Speaker 3: And this is a controversial question with really only one answer.
Speaker 3: What is the currency in Asia that could be a
Speaker 3: dollar alternative? And why is it so controversial US alternative?
Speaker 1: Yes, this is definitely something that is heavily debated across
Speaker 1: research desks. I'm sure. So I'm going to quote Netics's
Speaker 1: you know, there's a fantastic chief Asia Pacific economist over
Speaker 1: there who said that for this to be structural, you
Speaker 1: should know where to go. And nobody gives the return
Speaker 1: that the dollar has been giving nobody. So the euro
Speaker 1: is the second most traded currency in the world, the
Speaker 1: yen is the third, behind the dollar. But even those combined,
Speaker 1: it's hard to find a true alternative to the green back,
Speaker 1: and the Treasury's market, which backs a lot of this right,
Speaker 1: and the US equity markets. But people are certainly thinking
Speaker 1: about it, and their thinking in many ways is enough
Speaker 1: to trigger some really big swings in markets. Now imagine
Speaker 1: if that gains traction.
Speaker 3: But essentially, is this rewiring, this reframing of the global
Speaker 3: financial system and move away from US dollar dominance and
Speaker 3: move into emphasis on local currencies in Asia? Is this
Speaker 3: good or bad for Asia?
Speaker 1: You know, I don't even know whether I have an
Speaker 1: encapsulating answer for that. What I think we can conclude
Speaker 1: is that definitely there will be a recalibration of markets.
Speaker 1: How it will land and ultimately end up, and who
Speaker 1: the winners and losers are is still to be determined.
Speaker 1: Because this is such a seismic shift, people are racing
Speaker 1: to figure out. For instance, if we have a stronger
Speaker 1: Singapore dollar, a stronger Hong Kong dollar, a stronger yen,
Speaker 1: a stronger in a nation repair, how would that ultimately
Speaker 1: change everything from the psyche of the consumer through to
Speaker 1: the fabric of society and businesses as we know it today.
Speaker 1: So all of a sudden, if you're going to have
Speaker 1: people really focusing on buying Asia as a whole. It
Speaker 1: could accelerate everything from tourism through to technology, through to education,
Speaker 1: through to medicine, and rewire not just the market side
Speaker 1: of things but whole economies. But I think people are
Speaker 1: seriously at a point where they're trying to gain plan
Speaker 1: what that could look like.
Speaker 3: This is The Big Take Asia from Bloomberg News. I'm
Speaker 3: Rebecca Chung Wilkins. To get more from The Big Take
Speaker 3: and unlimited access to all of Bloomberg dot com, subscribe
Speaker 3: today at Bloomberg dot com slash podcast Offer. If you
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Speaker 3: Big Take Asia wherever you listen to podcasts. It helps
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Speaker 3: time and