Dollar’s Asian fall is good for the world

October 15, 2010

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.

Comments

The dollar cannot fall in isolation to asian currencies and not to OPEC and European countries due to carry over trades. Moreover, it’s not unique to asian countries at all to have dollar reserves, esp. regarding the focus on china is disproportionate. They make for an easy target for scapegoating when the trade imbalance is due to dollar dominance which we designed & promoted. Note the overall trade imbalance of the US at the bottom of the table:

http://en.wikipedia.org/wiki/File:Cumula tive_Current_Account_Balance_per_capita… .png

Japan may still currently hold the highest cumulative current account surplus. Note though that the per capita highest are OPEC countries. Note also a combined Europe (even then with only 1/3 the population of china) has a very high CCAS. Even if china eventually has the highest CCAS by country, it’s per capita is very low.

Focus should be on evening out CCAS by a per capita basis, not by country, hence OPEC countries and Europe need to spend more, not the chinese who are still very poor. And us in America need to spend far less.

Posted by mgunn | Report as abusive
 

The Germans, who have weathered and come through a mild recession unscathed, largely based on its growth in sales by BMW, Mercedes Benz and heavy machinery, have practically called Americans “currency manipulator” on the worldwide news english broadcast from Germany.

Is American reputation at stake here?
It seems that one of the strongest European economy sharply disagrees with the viewpoint of this article.

Posted by Janeallen | Report as abusive
 

Post Your Comment

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/