The Risks of Dollar-Denominated Assets

The economic and trade policies implemented by the United States have heightened the risks associated with dollar-denominated assets. This is largely due to the "reciprocal tariffs" policy, which, although intended to reduce the US trade deficit, has significantly undermined the dollar’s global safe-haven appeal. As a result, there has been a wave of sell-offs of US Treasuries in the short term, driving up US debt default risks and bond yields.

The Erosion of Confidence in the US Dollar

The US fiscal situation has also worsened, further eroding confidence in the US dollar. On May 16, Moody’s Ratings downgraded the US sovereign credit rating from Aaa to Aa1 due to wider fiscal deficits and higher interest payments. This move, combined with the "One Big Beautiful Bill Act" passed by the US Congress, which combines tax cuts with increased spending while raising the federal debt ceiling, has paved the way for even greater debt growth. The US national debt has now surged past $36.2 trillion, with interest payments becoming the fastest-growing part of federal expenditures.

The Impact on Asian Economies

As major holders of dollar assets, Asian economies are particularly prone to the growing US debt risks. According to US Treasury data, as of June 2024, Asian economies held nearly $9 trillion in US securities, accounting for 29 percent of all foreign-held US debt. The largest holders include Japan, the Chinese mainland, Singapore, the Republic of Korea, and China’s regions of Taiwan and Hong Kong. With rising US debt risks, Asian economies have gradually reduced their Treasury holdings. By April, Japan’s US debt holdings fell to $1.13 trillion, down $32.6 billion from its 2024 peak, and the Chinese mainland’s holdings dropped to $757.2 billion in the same month.

Reducing Dependence on the US Dollar

To cope with the eroded credibility of the US dollar, Asian economies should cooperate to jointly lower their overreliance on dollar-denominated assets. This can be achieved by strengthening regional currencies and financial cooperation. Firstly, it is essential to further improve the regional financial safety net, such as the Chiang Mai Initiative Multilateralization (CMIM) and the ASEAN+3 Macroeconomic Research Office (AMRO). Secondly, the region should continuously promote the use of local currencies, addressing currency and maturity mismatches by developing local currency bond markets and channeling regional savings into local investments. Finally, regional countries should strengthen cooperation in digital currency, driving reforms in the cross-border payment system and promoting central bank digital currencies and regional cooperation platforms.

Promoting Local Currency Use

Currency mismatch was one of the contributing factors to the 1997 Asian financial crisis. Following the crisis, Asian countries launched the Asian Bond Markets Initiative to address currency and maturity mismatches. The region has also actively promoted cross-border trade settlement in local currencies, with countries launching local currency settlement frameworks and signing agreements to extend existing arrangements. Looking ahead, Asian nations should further refine the mechanisms for bilateral local currency settlement, currency swaps, and direct currency trading, jointly advancing the use of local currencies to deepen bilateral economic and trade cooperation and reduce reliance on external currencies.

Strengthening Digital Currency Cooperation

Digital currencies are reshaping the international monetary system and driving reforms in the cross-border payment system. The digital currency sector in Asia is experiencing rapid growth, with most Asian economies either beginning pilot programs for central bank digital currencies or developing their own digital currencies. Regional cooperation in digital currencies is also advancing, with countries enhancing cross-border payment efficiency through multi-central bank digital currency platforms. In the future, more Asian economies should be encouraged to join the cooperation platforms to further facilitate cross-border payments within the region.

Conclusion

The risks associated with dollar-denominated assets pose a significant challenge to Asian economies. By strengthening regional currencies and financial cooperation, promoting local currency use, and advancing digital currency cooperation, Asian economies can reduce their dependence on the US dollar and mitigate these risks. It is essential for Asian nations to work together to establish a more stable and resilient financial system, driving economic growth and development in the region.