A sharp surge in the Taiwan dollar (TWD) has raised new questions about the U.S. dollar’s stability, especially as USD-rich Asian economies begin reassessing their FX exposure. While the Fed’s upcoming decision may have limited impact, shifting capital flows from Asia and a strong TWD could signal broader USD downside risks.
Contents
- 1 TWD Rally Highlights Broader Risks for the U.S. Dollar
- 2 FOMC Outlook: Limited Dollar Impact Expected from May Fed Meeting
- 3 EUR/USD Faces Contradictions: Overvaluation vs Reserve Inflows
- 4 GBP Steady Ahead of Expected BoE Rate Cut
- 5 CEE Currencies Await Central Bank Clarity
- 6 Conclusion: USD Faces Growing Pressure from Asia as Fed Stays the Course
- 7 About H2T Finance
TWD Rally Highlights Broader Risks for the U.S. Dollar
The Taiwanese dollar’s dramatic 7% rise since the end of April has captured the FX market’s attention, triggering speculation about deeper structural shifts in global currency flows. The move, which also saw gains in the Malaysian ringgit (MYR), Thai baht (THB), and South Korean won (KRW), was reportedly fueled by concerns among Taiwan’s USD-rich corporates that a U.S.-Taiwan trade deal might involve adjustments to USD/TWD.
Although Taiwanese authorities have denied any plans for FX realignment, thinner market liquidity likely exaggerated the rally. More importantly, the move has prompted life insurers and other large investors to reassess their USD holdings and increase currency hedging—possibly marking the early stage of a broader reallocation away from USD-denominated assets in Asia.
Asian USD Holders Rethink Exposure Amid Rising Hedging Demand
This emerging trend among Asian economies with heavy USD exposure suggests a deeper bearish narrative for the dollar. Investors in Taiwan and other markets may be motivated by both FX volatility and the growing potential for U.S. trade deals to be used as leverage against currency policy.
Should more regional economies follow Taiwan’s lead and hedge or unwind U.S. dollar positions, the greenback could face persistent pressure, especially if the U.S. Treasury remains passive in response to broad-based USD declines.
FOMC Outlook: Limited Dollar Impact Expected from May Fed Meeting
While the Taiwan dollar rally adds a new risk factor for the USD, immediate pressure from the Federal Reserve appears muted. The FOMC decision due Wednesday is unlikely to shift market expectations. Chair Jerome Powell has remained firm in resisting political pressure for rate cuts and continues to emphasize the need for inflation control to preserve labor market strength.
Markets currently price in a 23bp cut for July, with the first actual move not expected until September. The recent recovery in U.S. equities has reduced risk-off demand for the dollar, but that premium still exists, keeping the greenback supported in the short term.
EUR/USD Faces Contradictions: Overvaluation vs Reserve Inflows
The euro’s direction remains tied to USD sentiment. Should USD hedging or reserve diversification increase across Asia, the euro could benefit from inflows, despite the ECB’s dovish stance and lack of short-term data catalysts this week.
However, any euro strength driven by non-rate factors would pressure the ECB to act more aggressively. EUR/USD remains anchored at 1.130, with a break below opening a path toward 1.120. The pair remains vulnerable unless further USD reserve unwinding supports EUR gains.
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GBP Steady Ahead of Expected BoE Rate Cut
The pound is holding steady, with EUR/GBP supported near the 0.850 level. The Bank of England is widely expected to cut rates by 25bps this week, with the market fully pricing in this move. As such, immediate FX impact is likely limited unless forward guidance surprises.
Longer-term GBP strength still hinges on more conabout adding fresh sterling longs without a clear catalyst.
CEE Currencies Await Central Bank Clarity
Central bank decisions across Central and Eastern Europe (CEE) will be key this week. The Czech National Bank is expected to cut rates by 25bps unless CPI surprises to the upside. In Poland, the National Bank is likely to resume its easing cycle with a 50bps cut, potentially putting pressure on the PLN.
EUR/CZK may drop below 24.900 if the CNB surprises on the hawkish side, while EUR/PLN could test 4.300 if the NBP confirms its dovish outlook. The CEE region remains sensitive to inflation surprises and global risk sentiment.
Conclusion: USD Faces Growing Pressure from Asia as Fed Stays the Course
While the Fed’s near-term policy is unlikely to change, structural shifts in Asia’s USD exposure—sparked by the Taiwan dollar’s rally—are raising broader concerns for the greenback. With Asian investors hedging more and considering diversification, the dollar’s medium-term outlook may depend more on capital flows than interest rate differentials.
About H2T Finance
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