*NEWS*WILL THE FALLING DOLLAR HIT ASIA ?

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*NEWS*WILL THE FALLING DOLLAR HIT ASIA ?

 user 2006-05-08 at 10:02:00 am Views: 54
  • #15375

    Will the Falling Dollar Hit Asia?
    A
    confluence of factors could presage the long-predicted doom of the
    greenback. Economists say China and other Asian economies need to adjust

    Watch
    out for the great dollar crash! For most of this decade, gloomy
    economists and policymakers have warned that the mighty dollar is
    destined for a nasty correction that could shake the global economy to
    its core. And if it were to happen, things would look especially grim
    for the Asian countries that rely on U.S. consumers to snap up all
    their DVD players, flat-screen TVs, and Toyotas (TM ), and which have
    recycled their surplus savings to finance America’s gargantuan budget
    and current account deficits.Yet thE long-awaited currency adjustment
    that would get the process under way never seemed to materialize –
    until now, that is. A confluence of factors has sent the dollar down
    against key Asian currencies in recent weeks. First, the Group of Seven
    finance ministers issued a fairly blunt statement on Apr. 21 saying
    it’s time to get serious about dealing with the global imbalances in
    trade and capital flows. To some, such as Merrill Lynch Chief Economist
    Jesper Koll, that could be the first signal of a “powerful shift in the
    global economy” if the dollar continues to decline in value (see BW
    Online, 4/27/06, “Protection from a Falling Dollar”,On top of that,
    Federal Reserve Chairman Ben Bernanke has signaled the U.S.
    rate-tightening cycle may be drawing to a close. Though the U.S.
    central bank is expected to raise it key Fed Funds rate to 5% on May
    10, Bernanke has suggested the Fed could pause for a few months to get
    a better read on the inflation outlook.
    UNDER PRESSURE.  Figuring
    out just how far Bernanke will go is sure to be a big priority for
    currency traders this spring and summer. “Whether the final level of
    the Federal Funds rate is 5% or 5.25% or 5.5% probably does matter to
    the dollar’s performance over the next few months,” says Robert Sinche,
    head of foreign currency strategy at the Bank of America.Longer term,
    it looks like the dollar will be under considerable trading pressure.
    While the credit tightening cycle that started in mid-2004 is drawing
    to a close in the U.S., it is really just getting started in Japan,
    China, and much of developing Asia, where growth is strong and
    inflation is a real concern. Currencies are traded for a variety of
    reasons, but one big one is the future direction of interest rates. So
    if the Asians raise rates, it will add to the negative outlook for the
    dollar.Global investors and Asian finance ministers have started to
    focus on the dollar’s swoon against key regional currencies in recent
    weeks. It is sure to be a hot topic among finance ministers attending
    the Asia Development Bank’s annual meeting in India this week. So far,
    the adjustment has been fairly modest and orderly. The Japanese yen is
    up about 4% this year against the dollar, and Barclays Capital currency
    analyst Toru Umemoto sees the yen appreciating to 110 to the greenback
    over the next month, from about 113 as of May 3.
    POSITIVE SIDE. 
    Meanwhile, other regional currencies such as the Korean won, Thai baht,
    and Indonesian rupiah have appreciated by nearly 10%. China, of course,
    which carefully manages the trading range between the yuan and dollar,
    is feeling an enormous international push to let its currency
    appreciate dramatically against the dollar.
    This currency shift need
    not to be a catastrophe. In fact, if the adjustment is gradual, it
    could be positive. The big question is whether key Asian economies will
    start to fight the trend via currency interventions and other measures
    if they see their export sectors — vital drivers of growth across the
    region — starting to suffer.
    Two figures likely to play a big role
    in that drama will be Bank of Japan Governor Toshihiko Fukui and
    People’s Bank of China Governor Zhou Xiaochuan. They chart the monetary
    policies of the region’s two biggest economies, and the central banks
    they lead control nearly $2 trillion in foreign currency reserves –
    the lion’s share of which is invested in U.S. Treasury bonds and other
    dollar assets.
    INTERNAL PROBLEMS. 
    Without a doubt, China is home to the biggest undervalued currency in
    the region, thanks to Beijing’s insistence that dollar and yuan trade
    in a very narrow range. Back in mid-2005, the PBOC did abolish its
    fixed currency peg to the dollar and tolerate a yuan appreciation of
    about 3%, but the rate hasn’t budged much since then despite intense
    pressure from the U.S. to do more.The Chinese government is reluctant
    to take dramatic action on its currency because it needs a robust
    export sector and lots of growth to avoid social unrest and absorb 10
    million-plus new workers every year. Most economists think Beijing will
    tolerate a modest appreciation in the yuan in 2006 of 3% to 5% –
    though that’s still well below the 20% to 40% shift some believe is
    needed.But Zhou is probably more worried at the moment about the
    explosive growth of lending and investment in a Chinese economy that
    grew a scorching 10%-plus in the first quarter. Economic overheating
    could result in a boom and bust scenario that could create the very
    kind of economic stall Chinese President Hu Jintao’s government
    fears.The PBOC raised a key interest rate on one-year loans on Apr. 26
    (see BW Online, 4/28/06, “China Taps on the Brakes”). But it’s too
    small to have much impact and doesn’t address the central problem.
    Nicholas R. Lardy, a senior fellow with the Institute for International
    Economics, thinks China’s grossly undervalued currency and huge trade
    surplus are creating a “large increase in the domestic money supply,”
    heavy lending, and over-investment.
    “LINE IN THE SAND.” 
    In Japan, Fukui faces similar political pressure to go slow in any
    shift away from the BOJ’s ultra-loose monetary policy. He has signaled
    the time is approaching when rates will start to move from near levels
    in gradual steps starting later this year. The BOJ is worried about
    inflation taking hold of the economy, while Prime Minister Junichiro
    Koizumi’s government is far more anxious about a stronger yen’s impact
    on the country’s powerful export sector.A few years back, Japan’s
    Finance Ministry intervened massively in the currency market to depress
    the value of the yen against the dollar. To be sure, Japan’s economy is
    far stronger now. But Barclays analyst Umemoto thinks Japan will act if
    a stronger yen starts to hit earnings at Japanese corporations. An
    exchange rate of about 100 yen to the dollar “could be a line in the
    sand” for the Finance Ministry, he thinks.Few would deny that at some
    point the U.S. has to shore up its pitiful savings rate, consume less,
    and address its twin deficits. And most Asian leaders realize that they
    must stoke domestic demand and rely far less on exports for growth and
    prosperity. If the status quo continues, at some point the doomsayers
    will be proven right and things could turn very ugly for the global
    economy. Here’s hoping the dollar adjustment in Asia isn’t a rocky one.