The Great Dollar Unwind: Why Asia May Trigger A $2.5 Trillion Currency Shift

A quiet but consequential shift may be underway in global currency markets. According to a recent note by Eurizon SLJ Capital’s Stephen Jen and Joana Freire, Asian countries could begin unwinding as much as $2.5 trillion in US dollar reserves. This move, if realized, would represent a significant rebalancing of global financial flows—and could signal the start of a major retreat from the US dollar’s role as the dominant reserve currency.

The potential trigger? A combination of trade tensions, dollar overexposure, and evolving geopolitical priorities. As US-Asia relations deteriorate and the long-standing benefits of holding dollars diminish, central banks and institutional investors across Asia may begin to shift their strategies in ways that carry profound global consequences.

The Origins of the Dollar Stockpile

Over the last three decades, Asian economies have accumulated vast reserves of US dollars—primarily as a by-product of sustained trade surpluses with the United States. Export powerhouses such as China, Japan, South Korea, and Taiwan have long reinvested their dollar earnings into US Treasuries and other dollar-denominated assets, reinforcing the dollar’s dominance in global trade and finance.

This reserve strategy served multiple functions: it provided liquidity buffers, stabilized exchange rates, and supported export-led growth models. Holding US dollars, particularly in the form of government bonds, also offered a reliable store of value in a dollar-centric financial system.

However, this model is beginning to fray. The same countries that once benefited from a dollar-heavy reserve portfolio are reassessing the risks of overdependence—especially in light of shifting political and economic conditions.

What’s Driving the Potential Selloff Now

Several structural and strategic factors are converging to make dollar repatriation or reallocation more appealing to Asian investors.

First, the US-led trade war and the broader rise of protectionism have eroded trust between Washington and key Asian economies. Tariffs, export controls, and investment restrictions are prompting many countries to rethink the benefits of financial integration with the US.

Second, macroeconomic fundamentals have changed. The United States is running large fiscal and current account deficits, which may weigh on the dollar’s long-term value. Inflationary pressures and high levels of government debt add to the sense of unease.

Third, reserve managers are seeking more diversification. With the yuan gaining international traction, the euro stabilizing, and gold re-emerging as a preferred reserve asset, the opportunity cost of holding only dollars is rising. There is also a growing emphasis on aligning foreign reserves with strategic geopolitical priorities.

Finally, the shift in interest rate regimes—marked by high US rates—has introduced greater volatility and reinvestment risk. In contrast, domestic investment opportunities in Asia are improving, reducing the need to park excess capital in US markets.

Repatriation and Risk Management Strategies

Repatriation is already underway in subtle forms. Central banks may reduce new purchases of Treasuries while allowing existing holdings to mature. Sovereign wealth funds could increase allocations to local or regional assets, or pivot toward real assets such as infrastructure, critical minerals, and technology equities.

Private sector exporters and institutional investors are also reassessing hedging strategies. With the dollar expected to weaken over the medium term, more firms are ramping up currency protection—effectively reducing net dollar exposure even if headline reserves remain stable.

Historical examples offer precedent. During times of currency strength or external pressure, countries such as Japan and China have repatriated capital to stabilize domestic markets or pursue strategic investments. The current macro environment could produce similar decisions on a broader scale.

Global Market Implications

A sustained unwinding of Asian dollar holdings would reverberate through global financial markets.

In the US, demand for Treasuries could soften, potentially pushing up yields and complicating the Treasury’s borrowing costs. As major buyers exit, the Federal Reserve and domestic institutions may need to absorb more debt issuance—potentially tightening financial conditions or forcing policy recalibration.

In foreign exchange markets, a wave of selling pressure on the dollar could accelerate its depreciation. Though gradual diversification may blunt volatility, any perception of coordinated or accelerated moves could trigger sharp currency swings and reduce confidence in dollar-denominated assets.

Emerging markets that rely on dollar financing may also face turbulence. Shifts in dollar availability affect global liquidity, trade settlement, and capital flows. In short, the dollar unwind is not a purely bilateral issue—it’s a systemic one.

Strategic Responses from the US and Other Economies

The United States may respond in various ways—diplomatic engagement to reassure allies, fiscal tightening to restore credibility, or regulatory adjustments to maintain capital inflows.

The Federal Reserve will face renewed pressure to balance domestic mandates with international implications of currency shifts. Dollar liquidity provisions through swap lines or international coordination may become more frequent.

Meanwhile, other currency blocs will look to capitalize. The eurozone may promote greater use of the euro in trade settlements. China’s push to internationalize the yuan—including through central bank swap networks and cross-border digital currency trials—could accelerate. In the long term, the dollar’s share of global reserves may decline in favor of a more multipolar system.

Conclusion

The possibility of a $2.5 trillion dollar unwind by Asian countries is not just a matter of portfolio rebalancing—it reflects a broader reconfiguration of global financial architecture. While such a shift may unfold gradually, the drivers behind it are deep-rooted: geopolitical divergence, economic recalibration, and a long-delayed reassessment of risk.

For decades, the world relied on Asian exporters to fund US deficits and support the dollar’s supremacy. That equation is now changing. If Asian investors truly begin to pull back, the era of the unchallenged dollar could be entering its final chapter—and the global financial system must prepare for what comes next.

Author: Brett Hurll