An unprecedented signal just triggered on the US Dollar
The US dollar just collapsed against the Taiwanese new dollar, with the pairing falling 8% in just a few days, crashing below this key support line and reaching its lowest level in over a year.
That’s the biggest five-day move for the pairing on record. So what’s going on here? Could this be the first crack in the US dollar’s global dominance?
That’s what we’re going to dig into in this video. But first, let's look at what’s behind that massive dip in the US–Taiwan dollar pair. The answer is mostly speculation. The cause of the initial move in the currency was likely exporters selling some of their foreign assets, spurred by speculation that the Taiwanese government would allow the local currency to appreciate.
Why would they do this? Well, the US was entering trade negotiations with Taiwan, and one thing Trump wants is a weaker greenback because it makes American exports relatively cheaper abroad, giving them a competitive edge in trade. By allowing the TWD to appreciate against the dollar, the Taiwanese government and central bank might curry favour with the Trump administration and score a better trade deal.
The Trump administration has taken a hostile attitude towards many foreign countries – including allies – raising significant tariffs on imports from nearly every trading partner. This may lead exporting nations like Taiwan or Japan to let their currencies appreciate against the dollar in order to avoid penalties.
The US debt situation is also undermining the dollar’s strength. The US debt-to-GDP ratio stands at 124% – the highest it’s ever been. This raises concerns about America’s ability to manage its debt and the sustainability of the dollar. If global confidence continues to drop, countries might begin to diversify their reserves, moving away from the dollar.
And the dollar does have competition. Efforts by BRICS countries to promote alternative currencies – plus rising US–China tensions – could chip away at dollar dominance. But none of this is the nail in the coffin for the dollar. There are many reasons to believe it’ll continue to reign as the world reserve currency.
As we can see on this chart, the red line shows economic uncertainty, and the blue line is the US dollar index. These areas show major financial crises, including the European debt crisis in the early 2010s, the US–China trade war in 2018, the pandemic in 2020 and the Ukraine–Russia war. Throughout each of these periods of heightened uncertainty, the dollar mounted a substantial appreciation, as the US economy was seen powering through.
Read more: China’s economic crisis is worse than you think (here’s why)
This trend persists to this very day. And to bring the point home, central banks around the world still prefer to hold reserves in the US dollar by a huge margin. The share of dollar reserves remains high at 58% – nearly three times that of the euro, the only credible competitor. The huge share of dollar reserves shows that the dollar’s dominance remains strong. We’re still very far from any currency surpassing the dollar’s reserve share.
There’s also technical strength behind the dollar. This is the US dollar index, and it’s been moving in this long-term upward price channel going back to 2009. Despite the big dip earlier this year, we’ve not seen a long-term technical breakdown on the DXY yet. In fact, it’s still stronger than post-2008 lows when it hit 70, and it’s far from crisis levels.
Now, it’s important to remember that Trump wants a weaker currency for the competitive trade advantage that brings. So there’s a high chance he’ll manoeuvre to weaken it further from here. And if Taiwan’s currency appreciation – intentional or not – earns them a more favourable trade deal, it could incentivise other countries to do the same thing, weakening the dollar even more.
This has drawn talk of a possible Plaza Accord 2.0 – a repeat of the famous Plaza Accord of 1985, an agreement which intentionally depreciated the US dollar against a handful of other currencies. That led to a long slide in dollar valuation, as you can see here on the DXY.
Either way, the US dollar is unlikely to lose reserve status in the very near term. This kind of thing would likely take place on the scale of decades. But in the short term, we could still see more turbulence in dollar value and potential widespread depreciation if Trump gets his way.
At Capital.com, we’ll keep you updated on the value of the dollar, other currencies, as well as the latest market trends.
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