This episode explores the recent significant appreciation of the Taiwanese dollar against the US dollar and its implications for global financial flows, revisiting a previous discussion on the role of Taiwanese life insurance companies in purchasing US treasuries. Against the backdrop of a weakening US dollar post-April 2nd, driven by previously strong dollar positions and China's policy choices regarding tariffs, the conversation analyzes the factors influencing Taiwan's currency dynamics. Brad Setser explains that Taiwan's substantial current account surplus, managed through life insurers' investments in foreign bonds, is now facing a violent shift due to expensive hedging costs and regulatory adjustments. More significantly, the discussion covers the limitations of Taiwan's central bank intervention, suggesting potential motivations behind their actions, including risk management lessons for life insurers and pressure from the United States. As the discussion pivoted to potential future scenarios, including trade deals and increased domestic demand in Taiwan, the conversation highlights the possibility of a coordinated appreciation of Asian currencies. The episode concludes by examining the potential impacts on U.S. treasuries, corporate credit, and interest rate volatility, emphasizing a likely rotation in demand away from corporate bonds towards treasuries amid central bank intervention.
