Asia’s Dollar Dilemma: TWD Surge and the Shifting USD Landscape.
TWD’s 7% rally is driven by fears of a weaker USD/TWD in a US-Taiwan trade deal, plus poor liquidity and broader USD hedging shifts in Asia.
Asian countries may diversify away from USD assets, posing a medium-term risk for the dollar despite short-term stabilisation.
The Fed is expected to hold rates, with Powell resisting political pressure and signalling no cut until September.
Euro strength looks precarious, driven by reserve flows rather than rate differentials—risking further ECB cuts if it persists.
BoE to cut rates by 25bp, but the move is fully priced in, so sterling may hold steady, with EUR/GBP vulnerable to drifting lower.
USD: What Taiwan’s Rally Reveals About the Greenback
The standout story in FX markets this week is the sharp rally in the Taiwanese dollar (TWD), joined to a lesser degree by other Asian currencies like the MYR, THB, and KRW. The catalyst? Rumours that a trade deal with the US could involve a weaker USD/TWD—prompting USD-rich Taiwanese corporates and life insurers to pre-emptively hedge. Although Taiwan’s authorities have dismissed the idea, thin market liquidity helped amplify the move, with TWD now around 7% stronger than where it ended April.
However, this isn’t just about speculative headlines. With the dollar in decline, countries like Taiwan—heavily invested in USD assets—are taking FX losses and starting to hedge more actively or pivot away from the dollar altogether. That shift reflects a broader bearish narrative for the greenback. Ironically, a string of USD-friendly trade deals could instead accelerate diversification away from the dollar. We’re watching closely to see if today’s improved liquidity and China’s CNY fix signal more downside—and whether the US Treasury might tolerate further dollar softness, especially before tariff-driven inflation kicks in.
Back home in the US, it’s a quieter data week, with the Fed’s rate decision tomorrow being the headline. Powell is expected to hold firm against pressure from the White House for cuts. Markets are pricing in no move this time and only a 23bp cut by July. Powell’s emphasis on the need for price stability to sustain the labour market reinforces our base case: no cuts until September.
This Fed meeting likely won’t move the dollar much. A lot of its recent resilience comes from rebounding equities, which ease safe-haven demand. Still, the USD remains undervalued relative to short-term rates versus peers. The new Asian-driven downside risks are real—but may not fully materialise just yet. With speculative shorts still in play (particularly against the yen and euro), the dollar could still claw back ground, helped by any upbeat trade developments from Washington.
EUR: Stronger, But Not in a Good Way
It’s a quiet week for eurozone data, with market focus drifting to ECB speakers. Today, dovish board member Panetta is speaking in Asia, but recent commentary from the ECB hasn’t meaningfully shifted expectations. Markets continue to price in significant rate cuts—potentially down to 1.50% from the current 2.25%.
EUR/USD remains tethered to broader sentiment around USD positioning. If Asian reserve managers ramp up USD hedging or shift away from USD holdings, both the euro and yen could benefit from inflows. But a stronger euro not linked to rate differentials may backfire—prompting the ECB to ease further. Their own models already flagged EUR appreciation as a growth risk. Unless there’s a renewed wave of USD reserve unwinding, the euro looks stretched. A decisive break below 1.130 could open the door to a test of 1.120.
GBP: BoE Set to Deliver a Cut—But No Fireworks Expected
EUR/GBP has found support around 0.850, awaiting a clear catalyst to push lower. Sterling has gained from recent signs of thawing in UK-EU trade relations, but markets now want hard evidence before adding more long positions.
This Thursday, the Bank of England is expected to cut rates by 25bp—a move fully priced in by markets. We anticipate an 8-1 vote split (with one policymaker preferring a 50bp cut) and no shift in forward guidance, which should still favour a cautious, step-by-step approach.
As the BoE decision is well telegraphed, we don’t expect major volatility in sterling. EUR/GBP could hover around current levels for now. Given the euro’s larger vulnerability to reserve-driven flows, risks remain skewed towards EUR/GBP drifting lower.