How to Navigate the Global Currency Storm？

Recently, the international currency market has experienced significant fluctuations, with Asian currencies rising collectively. $TWD/USD (TWDUSD.FX)$ surged by 10% in two days, driving up other currencies. $HKD/USD (HKDUSD.FX)$ appreciated significantly, triggering the strong side conversion guarantee. The Singapore Dollar soared to a near-decade high. The Korean Won, Malaysian Ringgit, and others also rose.

The surge in Asian currencies is primarily due to a large-scale capital withdrawal from USD assets and a flow back to Asia, driving a historic rebound in Asian currencies. With the significant weakening of the USD this year, the $AUD/USD (AUDUSD.FX)$ has risen over 8% in the past month, and the $EUR/USD (EURUSD.FX)$ has also performed strongly, rising over 9% YTD. This is also a catch-up rise of Asian currencies against the weakening USD. The weakening of the USD is not just about exchange rate fluctuations; it also represents a decline in global investors' confidence in U.S. economic policies. While reflecting this sentiment, the foreign exchange market is also quietly affecting the flow of international investors' funds.

Multiple Factors Exacerbate USD Weakness

1. U.S. Fiscal Deficit Expansion and Economic Uncertainty

Data shows that the U.S. federal fiscal deficit expanded by 38% to USD 1.147 trillion in the first five months of FY2025 (October 2024 to February 2025), an increase of USD 318 billion from the same period last fiscal year, setting a historical high for the same period. The main increase in spending in the first five months of this fiscal year is due to increased expenditures on national debt interest and social security. National debt interest expenditures were USD 478 billion, up 10% YoY; social security expenditures were USD 663 billion, up 8% YoY.

The U.S. Federal Budget Accountability Committee pointed out that so far this fiscal year, the U.S. government has added an average of USD 8 billion in debt per day. The chairman of the organization believes that the U.S. government has made no progress in controlling the surge in debt.

The series of measures taken after Trump took office also brought uncertainty to the U.S. economy. Immigration policies and tariff policies have driven up U.S. inflation, delayed the frequency of Fed rate cuts, increased the cost of economic growth, leading to a decline in U.S. economic growth and increased uncertainty about the U.S. economy, further reducing the U.S. dollar's hegemonic status.

2. Trump's Tariff Policy uncertainty, Undermining USD Reserve Currency Status

From Trump's announcement of global reciprocal tariffs to the rapid suspension of tariffs for 90 days, to the current use of trade negotiations and stock market reactions to repeatedly raise, lower, delay, and withdraw tariffs. U.S. Treasury Secretary Bessent said in an interview: "In game theory, this is called strategic uncertainty. No one is better at creating this advantage than President Trump." The uncertainty of tariffs will further lead investors to gradually lose confidence in USD assets.

Analysts and investors generally believe that the U.S. attitude towards its allies and trade protectionist policies are shaking the status of the USD as a reserve currency. George Saravelos, global head of foreign exchange research at Deutsche Bank, also said that although President Trump has made concessions on tariffs, the damage to the USD has been done. The market is reassessing the structural attractiveness of the USD as a global reserve currency and is experiencing a rapid process of de-dollarization.

3. Trump's Repeated Intervention in Monetary Policy, Concerns About Fed Independence

Trump has repeatedly pressured Fed Chairman Powell, repeatedly emphasizing that now is the "perfect time" for interest rate cuts, and the market is concerned about the challenges faced by the Fed's independence. J.P. Morgan's latest research report pointed out that the Fed's independence is facing an unprecedented threat, which may have a profound impact on the U.S. inflation and interest rate prospects.

Investors are worried that U.S. government intervention will affect the effectiveness of monetary policy and question whether the Fed can remain neutral when making decisions. The Fed's independence is crucial for maintaining market stability. The divergence of the two important figures on monetary policy not only increases market uncertainty but also weakens market trust in the USD to some extent, leading investors to seek other currency safe havens.

4. Expected Decrease in Trade Surplus, Capital Flow Back to Asia

For many years, the world's major exporters have invested their huge trade surpluses in U.S. assets for decades, especially since the Asian financial crisis. Asia's savings are not only huge but also mostly redeployed to U.S. Treasury bonds and other assets. Tariffs cut off the continuous growth of future trade surpluses, and exporters, especially those in Asia with a large trade surplus with the U.S., may reduce the foreign exchange income formed by the trade surplus, changing the habit of trade USD flowing into U.S. assets.

How to Formulate Investment Strategies Under a Weak USD Trend?

As of May 7, the USD index has fallen by more than 8% year-to-date, close to a three-year low. Against the backdrop of the continued weakening of the USD, Asian currencies have appreciated against the USD in the past month. If this trend continues, it will put huge pressure on long USD positions. Renowned economist Stephen Jen warned that as Asian countries sell their holdings of USD, the USD, as the world's reserve currency, may face a "snowball" selling pressure of USD 2.5 trillion.

Goldman Sachs predicts that within the next 12 months, the $USD/JPY (USDJPY.FX)$ will fall to 135 JPY per USD, equivalent to a further depreciation of 6% from the current level. 

1. Short USD Index, Long Other Regional Currencies

The continued weakening of the USD can be directly shorted through the USD index. $DB US Dollar Index Bearish Powershares (UDN.US)$ aims to track the value changes of the USD against a basket of major world currencies. When the USD depreciates, the value of this ETF rises. Under the continued weakening of the USD this year, as of May 7, the ETF has risen by more than 10% YTD.

It is also possible to benefit from long positions in other countries' currencies when the USD depreciates because their assets are priced in other currencies. 

$Currencyshares Euro Trust Euro Currency Shares Npv (FXE.US)$ focuses on tracking the price of the Euro against the USD; 

$Japanese Yen Trust (FXY.US)$ provides investors with the opportunity to participate in the performance of the Japanese Yen against the USD, its value rises when the Yen gains momentum and falls when the USD rises;

$Invesco Ccy Shs Brit Pound Stlg Tr Brit Pound Sterling Shs Etf (FXB.US)$ provides the opportunity to participate in the performance of the British Pound against the USD; 

$Swiss Franc Trust (FXF.US)$ provides the opportunity to participate in the performance of the Swiss Franc against the USD; 

$Wisdomtree Trust Emerging Currency Strategy Fund (CEW.US)$ targets a range of currencies in emerging markets, providing investors with the performance of emerging foreign currencies globally.

2. Continued USD Weakness Impacts U.S. Stocks, Expand Diversified Equity Allocation

With the depreciation of the USD, the flow of global investors' funds has also shown a new trend. Year-to-date, the three major U.S. stock indexes are under pressure, with $S&P 500 Index (.SPX.US)$ down 4.67%, $Nasdaq Composite Index (.IXIC.US)$ down 8.39%, and $Dow Jones Industrial Average (.DJI.US)$ down 4.03%. The upward pressure on long-term U.S. Treasury yields has further increased the overall market unease, prompting capital outflows and increasing the selling pressure on U.S. stocks. At the same time, the market is also waiting for the Fed meeting, waiting for the signals released by Powell's speech.

Under the continued turmoil of U.S. stocks, maintaining cross-asset class and regional diversified allocation is a good way to cope with the volatility of U.S. stocks. 

$iShares MSCI Emerging Markets ETF (EEM.US)$ follows the MSCI Emerging Markets Index, making it one of the largest and most liquid ETFs in emerging markets; 

$Vanguard FTSE Emerging Markets ETF (VWO.US)$ aims to provide exposure to the performance of various companies in emerging market economies. This ETF tracks the FTSE Emerging Markets All Cap China A Inclusion Index, which includes large, mid, and small-cap stocks across emerging markets, covering a diversified range of industries.

$Ishares Msci Emerging Markets Ex China Etf (EMXC.US)$ tracks the MSCI Emerging Markets (Excluding China) Index, allowing investors to invest in emerging markets without directly investing in China; 

$iShares MSCI All Country Asia ex Japan ETF (AAXJ.US)$ tracks the MSCI AC Asia ex Japan Index, which covers the entire market in the Asia-Pacific region, excluding Japan.

$iShares MSCI Japan ETF (EWJ.US)$ aims to track the investment results of the MSCI Japan Index, which covers approximately 85% of the Japanese market's stocks. EWJ is one of the largest Japan-focused ETFs traded in the United States.

In addition, today the People's Bank of China held a press conference of the State Council Information Office, announcing a reserve requirement ratio cut of 0.5 percentage points, providing long-term liquidity of 1 trillion yuan, a policy interest rate cut of 0.1 percentage points, a cut of 0.25 percentage points in the interest rate of structural monetary policy tools. Attention can be paid to the performance of Chinese assets: $Direxion Daily FTSE China Bull 3X Shares ETF (YINN.US)$, $iShares China Large-Cap ETF (FXI.US)$, $Xtrackers Harvest CSI 300 China A-Shares ETF (ASHR.US)$, $KraneShares CSI China Internet ETF (KWEB.US)$ .

@TigerStars  @CaptainTiger  @TigerWire  @Daily_Discussion  @Tiger_chat  @Tiger_comments  @MillionaireTiger