The attempt by Washington to upend the global economic order has done more to dent confidence in U.S. financial assets than anything since the near collapse of the U.S. economy in 2008.
Recent financial volatility has caused Washington to find a face-saving way out of a crisis of its own making. That means it is likely there will be a spate of memorandums of understanding between Washington and its trade partners to defuse a potentially explosive financial time bomb.
Since flexible currency arrangements tend to govern the movement of capital—with notable exceptions like China—this implies that the appreciation of currencies against the dollar to help defuse the crisis is coming.
Investors, as a result, have begun purchasing select Asian currencies ahead of such a possible outcome.
State of play
Since the start of the year, foreign investors have found themselves having to jettison their holdings of U.S. Treasury bills and bonds as Washington seeks to exit the role of consumer of last resort.
Since the end of March, the U.S. dollar has lost 4.6% of its value versus the euro and 4.1% against the Japanese yen. As of May 7, the Taiwan dollar has gained a whopping 8.8% against the U.S. dollar and the Aussie dollar has appreciated by nearly 8% since April 8, 2025.
But it is not just exporters who have benefited from the strength of the dollar and the stability and liquidity of the U.S. bond market. Ostensibly, Taiwan insurance companies have decided to cut their losses by selling their unhedged investments in the U.S. Treasury market.
For years there was no reason to hedge a U.S. investment. An investment in a Treasury bond not only offered a greater return but it was also a safe-haven investment.
It is not just Taiwan. Fiscal policy is changing in the euro area and the UK, and monetary policy is changing in Japan, all of which is adding to the attractiveness of investing in their economies.
Much of these changes can be attributed to the geopolitical preferences of the new U.S. administration.
Not only were U.S. interest rates far more attractive than domestic rates, but the yield pickup of a U.S. government or corporate security would be augmented by dollar strength, with the safety of the investment guaranteed by U.S. institutional strength, and in particular, the rule of law.
Japanese investors have long supported and benefited from the U.S. economy and have reciprocated with purchases of U.S. government debt and by being a trusted ally.
The former was particularly the case for the years when the Bank of Japan relied on negative interest rates to stimulate domestic growth.
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But in March last year, negative rates were abandoned and policy rates have slowly moved above zero. So, if Japanese investors no longer have to hedge their currency exposure, and if Japan’s economy can be expected to continue growing, then a Japanese government bond looks that much more attractive and safe.
There has been talk of a replay of the 1985 Plaza Accord, which attempted to reverse the dollar’s strength. But that was a fruitless enterprise, with the currency market eventually taking control of the dollar’s value.
This current episode of dollar strength will more likely be ameliorated by investors recognizing the need to hedge their currency exposure and diversify their portfolios.
These past five months could very well mark the end of the U.S. century.
