A weak dollar is advantageous for Asia

William Pezek, Analyst, "Bloomberg News"

"Whether decline hurt the U.S. Asia?"

The question surprised even Kofi Annan, a man whose reporters are not so easily puzzled. United Nations Secretary-General just smiled and shrugged when asked whether the decline in the dollar hurt Asia. This happened a week ago in Jakarta, where Kofi Annan met with world leaders about the assistance to the victims of the tsunami on 26 December that claimed the lives of more than 160,000 people in Southeast Asia. This issue seems to have noted a shift from the problem of reducing the U.S. solely to finance socio-economic.

Here in Asia, the decline in the dollar last year at 7.1% against the euro and 4.3% for the yen has caused consternation at the highest levels of government. Some threatened to sell its currency to help exporters remain competitive, and many urged the U.S. to stabilize its currency. All in vain - the dollar continued to fall.

All the same, if not more blame on the fall of the dollar, we can not ignore the fact that it was good for the developing Asian markets and some of the economies of the region. It spilled a huge amount of liquidity in the development - the national debt, property, consumer goods and other assets in Asia. The trend was particularly acute because of the wave of investment in China, and it helps the global economy to move the fastest pace in two decades.

If the dollar stronger

The result is that the prospect of Asia depends more and more of when and if the dollar stops declining. "Attitudes towards the U.S. is the financial markets, and any other factors do not have such an impact", says chief economist for Asia of the "Morgan Stanley" Andy Xi.

Turn the trend may cause more harm than good to the economies of the region, stimulating the output of the Asian financial markets, which support the desired level of return on liabilities and expanding market shares.
Reaching the bottom of the dollar might signal the peak of all risky assets on a global scale. It is also likely to determine whether 2005 will be successful for many investors. If the dollar remains weak, 2005 will be similar to 2004 with the price rising more assets and a strong global economy, convincing bottom can turn into the major markets. "Revaluation of consumer goods and emerging debt and equity market, for example, could quickly adjust," said Xi. "There was a sharp slowdown in developing economies, as well as the global economy as a whole."

History Lessons

If you are unsure about the role of the dollar as a pillar for Asia, remember 1995, when he fell from 100 yen to 78 yen per dollar. This brought a sharp inflow of hot money in Asia. Cracks in the regional economy began to appear a year later, when the dollar regained its strength, prompting investors to flee from Asia faster than they would have done otherwise. No, a sudden dollar rally will not precipitate a financial crisis in Asia. Financial systems in the region are in much better shape than a decade ago, denominated in foreign currency debt and falling foreign exchange reserves are over-sufficient level. Chinese boom enhances the growth of the economy of South Korea to Vietnam.

However, risky assets, which were one-bid - the winning bid, in recent years, could not be in a better situation. Not all that bad, until the dollar rises properly, it can release a little air out of the market bubble of the world. After all, how many browsers, like Xi, are concerned about the discrepancies that arise in the investment world. Many global investors with scant knowledge of emerging markets like Asia, manage money through hedge funds. As the fastest growing number of Asian hedge funds invest the money, there is a global reallocation of assets.

Can the loss?

Xi said that this leads to "a huge inflation emerging market assets, leading to a better job of developing markets in the short term, and confirms the increased involvement of global investors in emerging markets." In other words, some Asian investors think that they can not lose, as many thought before the regional crisis of 1997-1998.

Under normal circumstances, this movement of funds from the U.S. would lead to higher interest rates to slow the outflow of capitals. Because the dollar is the key reserve currency for central banks and global trade-derived wealth, after inflation in developing markets, returning back to the U.S., because central banks are forced to buy American treasury bills.

Thus, the U.S. avoided the main effects of a weak currency - increasing the profitability of their obligations - and the weak dollar is a tool for expansion of global liquidity and economies of Asia.

However, there is and the darker side of all this?

"The power of psychology weaker dollar is that it makes global investors to forget about the usual concerns associated with emerging markets," said Xi. "Consequently, the premium for the risk virtually disappeared."

Typically, corporate governance issues, pop-up economies, like China, to provide a major market correction. Yet they do not exist. If the recent troubles in the "China Aviation Oil (Singapore) Corp.", Which lost $ 550 million, trading derivatives, are the tip of the iceberg, that investors in emerging markets can not wait for better times. The same applies to the increasing global prices naneft. So far, however, Asian governments, hope for a weak dollar should be careful in what they want.

Forex Magazine
based on www.bloomberg.com