Dollar disparities

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Articles by Oliver

Oliver Shale

Investment Specialist, US | Ruffer LLC registered representative

12 June 2025

‘Without experiencing setbacks, one cannot gain knowledge’ says a Taiwanese proverb. Despite its negligible role in global trade and portfolios, we think recent moves in the Taiwan dollar (TWD) contain vital lessons for allocators everywhere.

In early May, the TWD’s appreciation since the tariff shock turned disorderly, gaining nearly 8% in two days, accompanied by similar trends in other Asian currencies. As this month’s chart shows, this was a dramatic departure from its typical stability.

Several theories were advanced to explain the move. But the bottom line is that Taiwan is an economy with massive, mostly unhedged exposures to US assets, and its large life insurance sector was caught on the wrong side of this trade heading into a weaker dollar environment. This has important implications for other countries in similar positions – notably Japan.

Since the early 2000s, Taiwan has run a large current account surplus, exporting far more than it imports. Over the past decade, this surplus has risen to double digit percentages. The proceeds from this imbalance build up in the form of foreign reserves, which are recycled back into financial assets, and the favoured destination for these assets has been the US. As a result, Taiwan has amassed a large net international investment position (NIIP), about 39% of GDP, meaning it owns far more foreign assets than foreigners do Taiwanese assets. In short, Taiwanese institutions are very long US dollars, and what has been a great tailwind is now causing pain.

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Taiwan is not alone in this financial imbalance. Through the era of ‘US exceptionalism’, foreign investors have piled into US assets, helping fuel a virtuous cycle of rising valuations and insatiable demand. What’s more, they have been able to rely on the ‘dollar smile’: the dollar has both strengthened when US growth is strong and acted as a hedge during periods of recession. The perfect portfolio asset.

Given this dynamic and the superior performance of the underlying securities, it is no wonder allocators globally are all in on US assets. Since 2019, there have been $10 trillion of inflows from abroad into US equities. The flipside: the US has a record negative NIIP (94% of GDP).

This year, however, the dollar has been weakening. Notably, whilst US equities have largely recovered the losses which followed Liberation Day, non-US allocators who held unhedged positions may still be sitting on a meaningful drawdown. Worse still, in the moments of stress that seem more common these days, the US dollar has rarely behaved as a safe haven. This is undermining a cornerstone of conventional portfolios – that an unhedged US overweight is a safe bet. Could this go the same way as the negative equity-bond correlation – once a reliable risk management friend before it turned positive as we entered a regime of heightened inflation risk?

Certain idiosyncrasies made the move in Taiwan as large as it was. However, it is a reminder that, if everyone tweaks their allocations at once, the moves can be disorderly, and there is an incentive to be first when the winds begin to change. Slow-moving, structural trends are reversing in shockingly sharp and volatile episodes.

So what knowledge can investors gain from the setback Taiwan experienced? The risks of running a large US dollar overhang today. Similar financial imbalances can be found elsewhere – most notably for Ruffer, in Japan and the UK. Even a small rethinking of asset allocations or the repatriation of overseas funds will have important implications for their local currencies and could be an ongoing headwind for US asset valuations.

At Ruffer, we are always on the lookout for the safe havens of the future. Our portfolio has exposure to the trends discussed above through an allocation to the Japanese yen, which is well positioned to benefit from an unwinding of these imbalances.

Articles by Oliver

Oliver Shale

Investment Specialist, US | Ruffer LLC registered representative

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Piers Wheeler

Director – Institutional

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Developing and executing asset management strategy for capital raising and strategic relationship management. Coverage includes EMEA, Asia and Australia. Piers joined Ruffer in 2021, having previously worked with asset management firms including Eastspring, AMP Capital and LEK as a strategic consultant. He holds a MA from the Bayes Business School and a BA (Hons) from the University of Oxford.

Annabel Paterson

Senior Associate – Institutional

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Joined Ruffer in 2021, having graduated with a first class honours degree in land economics from the University of Cambridge. After two years working with the UK Private Wealth team and completing her IMC and CFA Level I qualifications, she now supports Ruffer’s global business development and client servicing efforts.

Articles by Annabel

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