Thoughts on the Market: Why is the Taiwanese Dollar Suddenly Surging?

Podcast Information:

• Title: Thoughts on the Market
• Host/Author: Morgan Stanley
• Episode: Why is the Taiwanese Dollar Suddenly Surging?
• Release Date: May 8, 2025

Introduction

In the May 8, 2025 episode of Thoughts on the Market, Morgan Stanley's global experts Michael Zesus, Head of Fixed Income Research and Public Policy Strategy, and James Lord, Head of FX and EM Strategy, delve into significant fluctuations within the currency markets. They explore the unexpected weakening of the US Dollar and the dramatic surge of the Taiwanese Dollar, analyzing the underlying factors driving these movements and their implications for investors.

US Dollar Weakening: Causes and Outlook

Initial Expectations vs. Reality

Michael Zesus opens the discussion by highlighting the initial consensus at the beginning of the year, which anticipated a strengthening US Dollar due to the implementation of tariffs and other economic policies. Contrary to these expectations, the Dollar has been on a downward trajectory.

Economic Slowdown Concerns

James Lord attributes the Dollar's weakening to worries about the US economy slowing down. He elaborates:

"I think a big factor for the weakening in the dollar... was a concern that the US Economy was going to be slowing down this year."
(00:44)

Lord points out that factors such as reduced immigration, limited fiscal policy actions, and the adverse effects of tariffs have collectively dampened economic growth prospects. This slowdown challenges the long-held notion of US exceptionalism in the currency markets.

Tariff Uncertainty and Market Sentiment

The introduction of significant tariffs in early April exacerbated the Dollar's decline. Lord notes:

"The tariffs were so large that it raised real concerns about the damage that was potentially going to happen to the US economy."
(01:34)

The inconsistent tariff announcements created uncertainty, leading investors to reassess the risk associated with the Dollar, which had enjoyed a 15-year bull market fueled by substantial capital inflows.

Future Projections

Lord forecasts that the Dollar may continue its downward trend, especially if the Federal Reserve responds to the economic slowdown by cutting interest rates:

"Mike Gapin and Seth Carpenter and the U.S. economics team are expecting to see the Fed cut to around 2.5% or so next year. And that's absolutely not priced."
(05:53)

Such a rate cut would further pressure the Dollar by diminishing the interest rate differential that currently supports its value.

The Surge of the Taiwanese Dollar

Unprecedented Currency Rally

A focal point of the episode is the remarkable appreciation of the Taiwanese Dollar. James Lord explains:

"On May 2, the currency saw its largest one day rally since the 1980s and over two days gained over 6.5%."
(03:05)

This surge is particularly unusual given the typically low volatility of the Taiwanese Dollar.

Causes of the Surge

Lord identifies two primary factors driving this rally:

1. Taiwanese Exporters Selling Dollar Assets:

   • Taiwanese exporters began liquidating their US Dollar holdings in anticipation of potential currency strengthening mandates from the US during trade negotiations.

2. Foreign Equity Inflows:

   • There was an increase in foreign equity investments, providing additional support to the Taiwanese Dollar.

Trade Negotiations and Currency Valuations

The episode delves into how US trade policies influence foreign currencies. Lord states:

"One of the things that the US administration has been focused on is currency valuations... local media in Taiwan have been talking about the possibility... the U.S. government would ask the Taiwanese authorities to try to push Taiwan dollar stronger."
(03:42)

Despite the Taiwanese central bank clarifying that currency valuation was not a component of the trade deal, the mere speculation prompted Taiwanese exporters to proactively adjust their currency holdings.

Market Reactions and Implications

The significant holdings of US Dollars by Taiwanese corporates and individuals—approximately $275 billion—mean that shifts in the Dollar's value have substantial implications for Taiwan's economy.

"Taiwanese exporters own a lot of dollars... so we think that that dynamic... has been the biggest factor in pushing Taiwan dollar stronger."
(04:40)

Global Foreign Exchange Market Insights

Mispricing in Currency Markets

Beyond Taiwan, Lord discusses potential mispricings in the global FX market:

"We see the Fed is being mispriced, but the ECB is being quite well priced at the moment."
(05:53)

He suggests that as the Dollar faces downward pressure, the Euro may appreciate towards 1.2, aligning more closely with its fundamental valuation.

Anchoring to Fundamentals Amidst Uncertainty

Michael Zesus emphasizes the importance of focusing on core economic fundamentals over policy-induced uncertainties:

"Best practice here is let's keep continuing to anchor to the fundamentals in our investment view."
(10:13)

This approach ensures that investment strategies remain robust despite the volatility driven by policy changes and market perceptions.

Trade Negotiations: Progress and Challenges

Ongoing Negotiations and Potential Agreements

Michael Zesus provides an update on US trade negotiations:

"The US is engaged in multiple negotiations across the globe and are looking to establish agreements relatively quickly."
(07:07)

He anticipates that agreements with traditional allies like Japan and Europe might lead to pauses in tariff escalations, providing some stability. However, negotiations with China remain challenging due to fundamental economic disagreements.

Tariff Levels and Future Trade

While some reduction in tariffs with China is expected, Lord cautions that they will remain significantly higher than pre-year levels:

"Still seeing them kind of settling out at still meaningful, substantial headline numbers... the 50 to 60% range."
(07:44)

This means that although trade may increase slightly, it won't return to the low tariff levels seen earlier in the year.

Continued Uncertainty

Both hosts agree that ongoing negotiations will bring more pauses and continual adjustments rather than definitive resolutions, perpetuating a state of uncertainty in the markets.

Conclusion

The episode concludes with a reaffirmation of the importance of grounding investment decisions in fundamental economic indicators while remaining cognizant of the uncertainties introduced by policy shifts and market perceptions. Michael Zesus and James Lord provide valuable insights into the current state of the US Dollar and the Taiwanese Dollar, highlighting the intricate interplay between economic fundamentals, policy decisions, and investor behavior.

"Conversations like this are extremely helpful to our audience. We'll keep tracking this carefully."
(10:13)

Listeners are encouraged to stay informed and adapt their strategies in response to the evolving market dynamics discussed in this episode.

Notable Quotes

• James Lord (00:44): "I think a big factor for the weakening in the dollar... was a concern that the US Economy was going to be slowing down this year."

• James Lord (01:34): "The tariffs were so large that it raised real concerns about the damage that was potentially going to happen to the US economy."

• James Lord (03:05): "On May 2, the currency saw its largest one day rally since the 1980s and over two days gained over 6.5%."

• James Lord (05:53): "We see the Fed is being mispriced, but the ECB is being quite well priced at the moment."

• Michael Zesus (10:13): "Best practice here is let's keep continuing to anchor to the fundamentals in our investment view."

This summary encapsulates the key discussions and insights from the Thoughts on the Market podcast episode titled "Why is the Taiwanese Dollar Suddenly Surging?" released on May 8, 2025, by Morgan Stanley. It provides an in-depth overview for those who have not listened to the episode.