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. 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. The world is still long US equities (or assets) and related FX rebalancing should continue to weigh on the dollar vs. the largest holders. Till end CY24, the large current account surplus Asian FX countries as well as EU/Nordic nations were buying into US assets at a very large pace due to the famous US exceptionalism theme. It was also assumed that in a global risk off scenario, DXY will rise & UST bond yields will fall hence providing a natural hedge to these investments. But that relationship stands broken now completely. Hence not only we believe that the incremental investments will be fully hedged basis but the legacy investments might soon see a large hedging call as DXY falls further. This will lead to maximum +ve impact for JPY & EUR. In effect this can then become a cascading loop cycle where we might even see DXY fall to 90 levels in a matter of couple of months.
