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Asian central banks tell customers to invest in yen, won, NT dollar |
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The Manila Times, Tuesday, 06/04/2004
By David DeRosa, Bloomberg Here’s something that must really rankle the Asian central banks. Virtually every bank dealing in foreign exchange is telling its customers to sell the dollar and buy Asian currencies. And this is occurring at the same time that the central banks want to rein in their high-flying currencies. The logic for investors seems undeniable. Asia has begun to grow once again and the US has a twin deficit problem - a fiscal deficit at the federal level and a current account deficit on trade. It’s a simple story: The dollar is a bad bet and the Asian currencies are good bets. This can be heard in any discussion about foreign exchange. The Asian currencies now favored are the yen, the South Korean won and the Taiwanese dollar. The Malaysian ringgit is on the list, too, though it is pegged to the dollar. The play on the ringgit is to buy Malaysian short-term government paper. There’s a yield pickup over US Treasuries, plus a potential foreign exchange bonanza if the Malaysia revalues or floats its currency. And the winner? Who’s going to win this tug of war, the central banks or the traders? In the end, neither one can take an exchange rate to a noneconomic value. If the traders are right about the fundamentals, the Asian currencies are going to rise. So where does that leave the central banks? Probably looking for a face-saving solution, and to a certain extent that may exist for South Korea. Korea’s central bank may be watching the yen as much as the dollar in making its decision about continued won sales to prevent its currency from further appreciating. The Koreans could see any relative strength in the yen over the won as desirable because Japan’s export industries are prime competitors. Both Korea and Japan orient foreign exchange policy to favor their export industries. They each dislike seeing their currency strengthen against the dollar and the euro. The consolation for Korea is that the won, though rising in value, is climbing slower than the yen. The central banks of Korea and Japan are well known for being interventionist. Both banks sell their currency against dollars to stop or at least slow the rise in the unit. Whether this works is another question. Still, these two central banks are major factors in Asian currency trading. During the past year, the scorecard has favored the Koreans. The won has strengthened against the dollar by about 10 percent over the last 12 months, while the yen has appreciated by almost 15 percent during the same time period. That may be something of a victory, in a comparative sense, for the Korean bank. On the other hand, maybe the economic situation in the US is not as bad as the currency markets would indicate by way of a weak dollar. Things might be at work that could take some of the excitement out of the Asian currencies. Everything in foreign exchange works on the margin. All the bad news about the twin deficits facing the US has been out for some time. Jobs salvation What happened on Friday when the dollar was well bid against Europe and Asia was quite instructive. To the total surprise of nearly everyone in the marketplace, a huge number of new jobs308,000were created in March. The numbers for January and February were revised higher to 159,000 and 46,000 respectively. If that jobs growth can be sustained, then there may be some hope of tackling the budget deficit. When people get jobs, they pay taxes. Collect enough taxes and the deficit goes away. When the dollar finally stops falling and begins rising, it will be because of the perception that the US economy has improved, not because the Asian central banks are or are not fiddling with exchange rates. David DeRosa is also adjunct finance professor at Yale School of Management and author of In Defense of Free Capital Markets. < Previous | Next > | Latest News |
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