Dollar’s Asian fall is good for the world
The dollar this week touched its lowest level for 2010. That little Singapore’s adoption of a higher trading band helped trigger the sell-off adds to the talk of its demise. The expectation of more quantitative easing at home is certainly not helping the U.S. currency. But the relative rise of Asian currencies is a good thing. Global rebalancing has been called for: this is it.
Asian currencies need to revalue. Many economies are growing fast, with exports a key driver. The countries run trade surpluses and also attract large capital flows. Their response has been to try to prevent currency appreciation. That means soaring foreign exchange reserves, excess money growth — and the risk of inflation and asset bubbles.
Take Singapore. The government expects GDP growth of between 13 percent and 15 percent this year. The Monetary Authority of Singapore is worried that inflation will “rise to around 4 per cent by the end of 2010 and stay high.” Appreciation of the Singapore dollar would help by reducing the cost of imported goods. And Singaporean consumers won’t say no to cheaper imports — they’ve earned them.
Other Asian economies see similar pressures but are not all reacting the same way. South Korea’s inflation rate has risen to 3.6 percent but the central bank this week held back from raising its 2.25 percent policy rate for fear of pushing the won still higher.
The big outlier, however, is China, whose fixed exchange rate has been allowed to rise by only 2 percent against the dollar since June, after being fixed for the previous two years. For the rest of Asia, this means that allowing currencies to appreciate against the dollar means losing competitiveness to China — a clear deterrent to revaluation. The likelihood is that at the G20 meeting in Seoul in November many Asian countries will press China hard to let the yuan rise faster.
The trend, however, is clear. Rapid growth tends to lead naturally to currency appreciation. Provided it is allowed to happen, that will stoke import demand in Asia, helping depressed western economies recover. For all the gloom, the dollar’s fall isn’t harmful.