(Bloomberg) -- Asian investors are poised to sell as much as $500 billion of dollars into next year, putting further pressure on the US currency, according to Skandinaviska Enskilda Banken AB.
This stockpile has been built up in the form of deposits hoarded by Asian exporters, pension funds over-allocated to dollar-denominated assets, and relatively low levels of foreign-exchange hedging, strategists Namik Immelback and Dana Malas wrote in a research note.
“Under an aggressive scenario for a subset of data/agents we could see $400 billion to $500 billion dollar-equivalent of FX rebalancing,” they said. “Together with a US ‘from exceptionalism to growth convergence’ theme, the FX rebalancing potential adds to the view of a weaker US dollar into 2025.”
The Bloomberg Dollar Spot Index has fallen almost 3% since the end of June, poised for its first quarterly decline this year, amid speculation the Federal Reserve will start cutting interest rates as soon as its September meeting.
Japanese and Taiwanese life insurers have relatively low currency hedging ratios, while Japan’s Government Pension Investment Fund is running a higher allocation to foreign bonds than it did in 2018, the strategists wrote. Foreign-currency deposits, predominantly in dollars, have also built up across Asia, they said.
Nine of Japan’s biggest life insurers had 47% of their foreign securities covered with derivatives that help shield them from losses in case the yen strengthens, according to the companies’ earnings reports as of March 31 compiled by Bloomberg. That’s the lowest since September 2011.
There’s also a longer-term trend among Asian reserve managers to diversify away from dollars into other currencies, as well as gold, the SEB strategists wrote. “There could be a continued strategic plan to diversify away from US dollars,” they said.
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