The US dollar kicked off the week on the back foot as a wave of strength swept across Asia-Pacific currencies, fueled by speculation over possible US semiconductor tariffs and rumors of a “Plaza Accord 2.0.” The synchronized appreciation of regional currencies has stunned investors and prompted swift responses from Asian central banks as global markets brace for more volatility.
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USD Weakens While Asian FX Soars
At the start of this week, the US dollar continued to weaken as several Asia-Pacific currencies posted sharp gains. Even with many financial centers closed for public holidays—including Tokyo, China, Hong Kong, and South Korea—currencies such as the offshore Chinese yuan (CNH), Taiwanese dollar (TWD), Malaysian ringgit (MYR), Japanese yen (JPY), and Australian dollar (AUD) rallied significantly.
The TWD stunned markets with its largest single-day gain in over three decades—rising 2.4% on Monday after a 3.7% surge last Friday. Speculation surrounding a potential trade deal involving currency recalibrations between the US and Taiwan, along with broader regional moves, has driven a spike in investor demand for local currencies.
Hype Builds Around a “New Plaza Accord”
Market chatter has grown louder around the possibility of a modern-day version of the 1985 Plaza Accord, in which major economies collectively acted to weaken the US dollar. Investors are speculating that a coordinated effort—possibly led by the US—could pressure Asian trade partners into allowing their currencies to appreciate as part of broader trade negotiations.
Although the idea remains speculative, traders are increasingly positioning for a scenario where the US demands currency adjustments as part of its bilateral and regional trade discussions. This has sent Asian currencies soaring, prompting urgent reactions from regional authorities.
Taiwan’s central bank held an emergency press conference on Monday, warning that exporters and foreign investors had triggered “excessive” buying of the TWD. The financial regulator also summoned major life insurers—many of whom hold large positions in USD-denominated bonds—to assess currency risk exposure.
Ripple Effects Across Global Markets
The impact of the dollar’s decline isn’t confined to Asia. The Bloomberg Dollar Spot Index ended Monday 0.2% lower in New York trading, extending its year-to-date decline to nearly 7%—the worst since the index’s inception. The euro climbed above $1.13, while the yen gained nearly 0.9%. Among the G10 currencies, the AUD led the pack, reaching a five-month high near $0.6490, buoyed by the ruling Labor Party’s decisive electoral victory.
Asian equity markets were mixed, with India, Singapore, and Indonesia advancing while Taiwan, the Philippines, and Australia fell. European bourses also showed modest variations, while US index futures dropped between 0.65% and 0.90%.
Bond yields followed suit, with European benchmarks down about two basis points. US Treasury cash markets were closed due to the London and Tokyo holidays, but futures prices pointed to significantly lower yields.
Washington Pushes Back on Market Narrative
Despite the widespread belief that investors are rotating out of US assets, US Treasury Secretary Scott Bessent dismissed this notion at the Milken Institute Global Conference in California. He reiterated that the US remains a top destination for global capital and emphasized that trade negotiations, while not always smooth, would ultimately strengthen economic ties.
Still, analysts warn that the currency market volatility could bleed into other asset classes, particularly US Treasuries. While recent auctions have seen continued foreign interest, Monday’s $58 billion 3-year note sale saw a dip in indirect bidder participation—a proxy for foreign central banks.
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What’s Next for the US Dollar?
From a technical standpoint, the Dollar Index appeared to be forming a bottoming pattern late last week, but its failure to follow through casts doubt on that narrative. With the US labor market still showing strength and the Federal Reserve expected to maintain a hawkish tone at its upcoming meeting, there’s still potential for a near-term dollar rebound.
However, falling yields, sliding equities, and weaker oil prices are complicating the outlook. Wednesday’s potential announcement of new semiconductor tariffs, along with any hints of regional currency coordination, will be closely watched by markets.
Conclusion:
The US dollar faces renewed headwinds as Asian currencies surge on speculation of coordinated exchange rate policies tied to upcoming trade negotiations. While talk of a “Plaza Accord 2.0” remains unconfirmed, markets are reacting as if a regional currency revaluation is already underway. Central banks across Asia are on high alert, ready to step in to control excessive volatility. Investors around the world should brace for a turbulent week as currency markets take center stage.
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