*NEWS*WILL THE FALLING DOLLAR HIT ASIA ?

[Anonymous]

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.

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May 8, 2006 at 10:02 AM