Double Whammy: The yuan’s stability as the US dollar weakens is forcing Asian countries to fight to maintain competitiveness and curb their own currencies’ ascent.
Asia’s small, open economies are caught in the crossfire of a tussle between the US and China over whether the yuan should strengthen against the dollar to fix the lopsided global economy.
The greenback’s slide against Asian currencies is dealing a double whammy to the region’s export-dependent economies, hitting their exports and eating away at their massive foreign exchange holdings.
Some see the US dollar’s decline as a necessary adjustment to reduce global trade imbalances, but it has not weakened significantly against the Chinese yuan, whose value is tightly managed by Beijing — to much US criticism.
“The West needs to save more, Asia and the Middle East need to spend more, and currencies need to adjust,” Standard Chartered chief economist Gerard Lyons said.
“The big problem is the continued recent stability of the Chinese yuan against the dollar. Yuan stability is forcing many Asian countries to fight to keep their currencies stable to maintain competitiveness,” he said.
The currency issue risks stoking trade tensions when leaders of the 21-member APEC forum meet in Singapore on Saturday and Sunday to discuss the global economy and free trade.
The US dollar has plunged about 15 percent against a basket of six other major currencies from a peak earlier this year, and recently hit one-year lows against a batch of regional Asian currencies.
US officials ritually express their backing for a “strong dollar,” but have done nothing to arrest its slide, which many see as necessary to reduce the big US trade deficit and support struggling US exporters.
Beijing for its part re-pegged the yuan to the US dollar in July last year as the global financial crisis hit its exports.
Facing a loss of competitiveness against China’s exporters, several central banks in the region — mainly in Southeast Asia — have bought US dollars in recent weeks to curb their currencies’ ascent, traders say.
Experts say China is unlikely to loosen its grip on its currency until it is confident that its economy is past its recent wobble.
“Currency moves would help to reduce global imbalances but policymakers don’t view it as a priority,” said Dariusz Kowalczyk, chief investment strategist at SJS Markets in Hong Kong.
“Every country has its national interests. It’s in the interests of China to promote its exports,” Kowalczyk said.
China is unlikely to adjust its currency policy before the middle of next year and any rise in the value of the yuan against the dollar would be gradual, he said.
Virtually free credit in the US and other major economies has fueled a massive binge by investors on risky assets, such as equities and commodities, while leading to a sell-off of the US dollar.
Nouriel Roubini, the New York University professor who earned the nickname “Dr Doom” for predicting the global financial crisis, warned last week that this “mother of all carry trades faces an inevitable bust.”
“The reckless US policy that is feeding these carry trades [selling low-return currencies to buy other higher yielding assets] is forcing other countries to follow its easy monetary policy,” he wrote in the Financial Times.
“Central banks in Asia and Latin America are worried about dollar weakness and are aggressively intervening to stop excessive currency appreciation,” Roubini wrote.
Some analysts see India’s recent move to buy 200 tonnes of gold from the IMF for US$6.7 billion as a clear sign that countries are losing confidence in the US currency.