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Asian unpegging crucify us { October 3 2003 } Original Source Link: (May no longer be active)
http://www.manilatimes.net/national/2003/oct/03/opinion/20031003opi4.htmlhttp://www.manilatimes.net/national/2003/oct/03/opinion/20031003opi4.html
Friday, October 03, 2003
COMMENTARY
By William Pesek Jr.
Would Asia unpegging crucify the US?
AVINASH Persaud didn’t set out to make a room full of currency traders squirm in their seats. Yet the director of GAM-Persaud Global Investment Fund did just that to the usually steel-stomached risk takers.
His fidget-inducing words focused on the bond markets. “If Asia unpegs its currencies and moves toward floating ones, US bond yields will surge,” Persaud said at a foreign-exchange conference in Singapore this week. “Rising bond yields would crucify the US economy.” Ultimately, the global one, too.
Persaud’s argument is a connect-the-dots one; it’s as convincing as it’s disturbing. It also makes you wonder if US Treasury Secretary John Snow truly understands the risks involved in demanding that China and other Asian countries scrap their pegs to the US dollar. It could do far more harm than good to the US bond market and the world’s biggest economy.
Asia’s dollar pegs, Persaud explained, do more than Washington appreciates to finance the growing US current account deficit. Through these dollar pegs, he said, more than 90 percent of the current-account surpluses earned by Asian nations through trading with the US, Europe and Japan, are put on reserve in US Treasuries.
Central banks in Asia alone buy more than 40 percent of all international purchases of US government debt. If Asian countries stopped pegging currencies to the dollar, the region’s reserves would no longer rise and flow into US assets. Someone else, it follows, would need to help the US finance its economy.
US bond yields would have to rise considerably to attract buyers from overseas or at home.
“Rising US bond yields now would snuff out the hesitant economic recovery and a collapse in the dollar would weigh on the European and Asian economies,” Persaud explained. “Far from being a panacea to America’s woes, the abandonment of Asia’s dollar pegs would force the US into a dollar crisis and would add to deflationary pressures in Europe and Asia.”
For the moment, Asians are balking at Washington’s calls for more flexible foreign-exchange rates. China, Hong Kong and Malaysia, are sticking with their links to the dollar, while Japan is again selling yen to halt its rise.
Currency pegs are the norm here, whether they are official or not. Japan and Korea, for example, actively manage their currencies even though both have “free-floating” ones. That’s especially true of Japan, which sold yen this week, reminding markets it will continue to weaken the yen.
Tokyo’s latest actions should dispel any lingering hopes that the Group of Seven’s September 20 call for flexible exchange rates was another Plaza Accord. That 1987 agreement to weaken the dollar was history making. Last month’s G-7 statement, it now seems clear, was about paying lip service to the US, not altering global currency trends.
Yet there’s a bit of irony in all this: If the Bush administration is looking for a quick fix in the currency markets, it might consider calling for devaluations around Asia. “Bigger Asian surpluses would support the US Treasury market,” Persaud argues. That would pump more liquidity into the US financial system.
Others also wonder if the US has thought through its Asia-should-let-currencies-float campaign. “The risk is the law of unintended consequences,” said Gene Frieda, a strategist at the Royal Bank of Scoland. Added Hon Cheung, a managing director at State Street Global Advisors: “I think there’s a sense in the marketplace that the US is ‘playing with fire.’”
Asia should indeed let its currencies trade freely, allowing markets to set their value, not governments. Snow and his staff at the Treasury also must consider the devastating affects depegging Asia’s currencies could have on US markets. Saving manufacturing jobs as the 2004 election approaches is good politics, but that doesn’t make it good economics.
“Exchange rate changes don’t bring lasting fixes,” Persaud said. “In reality what needs to happen is that US consumption is reined back in.”
Asians wonder if the dollar correction investors have been predicting for years is already afoot. The Bank of Japan sold a record 4.46 trillion yen ($40.1 billion) from August 28 to September 26, bringing the year-to-date total to 13.5 trillion yen even before its intervention Tuesday. The magnitude of the yen sales was “shockingly massive,” said Paul Donovan, global economist at UBS Warburg. “This suggests that the dollar may be sicker than we think,” he said.
It’s not clear what Washington is doing about all this, and that worries investors here. With US rates already historically low and the nation’s budget deficit growing apace, investors are getting antsy. “The right policy mix is the one which got America out of its last twin deficit problem in the early 1990s: low interest rates and higher taxes,” Persaud said.
With a US election on the way, it’s much easier to pick on the currency policies of China and other Asian economies. If the White House isn’t careful, though, its actions could cause bigger problems.
--Bloomberg
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