Shuli Ren, Bloomberg
An academic paper has caught Asia’s eye. In a piece published last November, Stephen Miran, Chairman of the Council of Economic Advisers and the brain behind the so-called Mar-a-Lago Accord, mentioned dollar “overvaluation” 10 times. It weighed on American manufacturing, blighted communities, and may even play a role in opioid addiction, he wrote.
The economist is probably right that the greenback is expensive. Until recently, the rest of the world was enamored with US assets, driving an uptrend that began in 2011. By the end of 2024, the currency was overvalued by 18.5%. That compares to 9.4% at the end of 2016 after President Donald Trump won his first election, Bank of America Merrill Lynch estimated based on the International Monetary Fund’s real effective exchange rate model.
Miran needs to be careful what he wishes for, however. Devaluing the dollar may well not be gradual or orderly.
Let the Taiwan dollar’s sharp breakout be a warning shot. While much of the discussion centered on the island’s life insurers whose scramble to hedge exchange rate risks pressured the US currency, what Asian exporters have been habitually doing may cause a much bigger avalanche.
Americans have been buying a lot of stuff since the early days of the pandemic, bringing a windfall for merchants across Asia. The dollars they earned are likely hoarded in liquid money market instruments. It was a no-brainer for the Koreans and Taiwanese. In the year ending March, the won depreciated 8.5%.
Chinese exporters have not been repatriating their foreign earnings either, deterred by weak demand and falling asset prices at home. In 2023 and 2024 alone, China generated an almost $2 trillion trade surplus. Did a sizable chunk of that money simply sit in dollar savings accounts, perhaps in Hong Kong?
Unfortunately, these naked positions are not captured by macro data on foreign direct investments or portfolio flows, which an academic like Miran might look at. They might be “extremely large,” to the order of $2.5 trillion, Eurizon SLJ Capital wrote in a recent note.
This is why Miran’s overt dollar overvaluation talk is so dangerous. Asian companies are wary that exchange rates will be one of the key pillars in their governments’ trade negotiations with the White House. They are also aware that the greenback has gotten expensive. Any rumor of, say, Seoul agreeing to strengthen the won, or a few Taiwanese exporters heading for the exit will reverberate across the region. Last week, Hong Kong’s 1-month Hibor halved to just 1.94%, as the city’s de facto central bank purchased the US dollar to defend its peg. These are historical moves.
Long-time market participants worry that Miran, who received his PhD in economics from Harvard in 2010, is out of his depth. While he has identified a big problem, his controversial solutions, such as using tariffs as sticks to force trading partners to jointly devalue the dollar, and a large-scale Treasuries debt swap into ultra long bonds to ensure the greenback’s orderly depreciation, may not work at all. Asian exporters may be a rude awakening for the academic.
Courtesy Bloomberg/Shuli Ren
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