Regional currency revaluations in order


The overdue weakening of the US dollar has only just begun. It will be a great, if gradual, relief to Hong Kong. But there could be some regional currency traumas along the way affecting the future relationship between the Hong Kong dollar and the yuan.
The latest dollar reverse may have been due to fears of the global consequences of US President George W. Bush's war-mongering. But war or no war, the dollar's destiny has been spelled out by none other than Alan Greenspan and his fellow Federal Reserve Board member Ben Bernanke.

Mr Greenspan said recently: ''There is virtually no meaningful limit to what we could inject into the system were that necessary.'' Mr Bernanke was even more explicit: ''The US government has a technology called the printing press [or today's electronic equivalent] to produce as many US dollars as it wishes at virtually no cost.'' He elaborated on how to deliberately lower the price of the dollar by increasing supply.

Granted, their remarks were calculated to address fears of deflation, as prices have remained almost stable despite large injections of money and financial stimulus. But they say much about the forces driving monetary policy.

Producing dollars may be cost-free to the US government. The cost is ultimately borne by the foreigners who have enabled the US to run a current account deficit in excess of 4 per cent of GDP. Dollar strength since the collapse of the technology bubble has been due not to individual foreign investors but Asian governments, notably China and Japan.

In pursuit of short-term, predatory trade goals, Japan has been investing in dollars instead of consuming at home; China has invested in domestic projects, which should have far higher rates of return than US household debt.

The US is destined by the political cycle to try to sustain consumption-led growth despite its huge household debt levels. It is required by the confluence of impending war, declining tax yields and tax-cut stimulus to run a huge financial deficit. It is going to need very lax monetary policy to keep treasury yields down. The cost of this is borne by the dollar. It is worth 15 per cent less than a year ago, and could fall much further.

From an Asian perspective, the main problem of a weak dollar is as much fear of each other as of impact on US demand. The Plaza Accord in 1985, which led to a rapid decline of the dollar against European and Japanese currencies, was followed by revaluations of other trade-surplus countries such as Taiwan. It would be reasonable to see a repeat of this, although through the market rather than political muscle. Most Asian currencies, which fell sharply in 1997-98, are now conspicuously undervalued. Those declines, driven by capital movement more than trade imbalances, were overdone.

All other things being equal, one might expect the South Korean won, Taiwan dollar, Thai baht and the Australian dollar to weather an appreciation of at least 25 per cent against the dollar. In turn that would go some way to restoring Hong Kong's competitiveness. However, the problem lies with China and Japan. No country in Northeast Asia can currently afford to see its currency appreciate too much against the yen and none in Southeast Asia against a dollar-pegged yuan.

Japan's insistence on a weak yen is driven by domestic deflation considerations rather than by external circumstances. In practice, Japan may not be able to prevent the yen from rising along with the euro. But neighbours must demand that Tokyo not use currency policy as a substitute for domestic management failures.

Likewise, Asian countries must talk to China about a revaluation. The competitiveness of Chinese exports is shown by its trade surplus. It now has a much larger surplus with the US than that of Japan, and also a large surplus with Japan. All this is thanks to its 1995 devaluation and subsequent influx of foreign investment into export industries.

The Sino-US relationship will sour quickly if a fall in the dollar simply increases China's surplus at the expense of other suppliers. Asian countries will also, rightly, be angry at China's abuse of capital controls. To fail to revalue when everyone else is effectively doing so would be damaging to China's long-term interests in the region.

What does this say about the relationship between the yuan and the Hong Kong dollar? First, a big fall in the US dollar would be a relief to Hong Kong. It should become the platform for shifting to a floating rate, or a peg to a basket of currencies. Likewise, the yuan needs to move in the opposite direction but then settle to a managed float or basket. There is no logic in the yuan and Hong Kong dollar having the same rate against the US dollar now. But it is possible to see the relationship between the two stabilising, with both pegged to a basket containing yen, euros, won and even Taiwan dollars. But there will be plenty of currency market and diplomatic sparks before we get there.

Philip Bowring ( is a Hong Kong-based journalist and commentator.



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