Asia grumbles over apportioning burden of U.S. dollar's potential fall

Asia's Real Currency Worries May Be Dollar

By Hideyuki Sano
Reuters
Sunday, May 6, 2007

http://www.reuters.com/article/bondsNews/idUST21280820070506

KYOTO, Japan -- Although Asian finance ministers have just agreed on a new contingency measure to defend their currencies, their real concerns appear to be a plunge in the U.S. dollar rather than a rise in their own units.

"Should the financial markets lose confidence in the U.S. dollar, huge capital outflows from the U.S. could lead to a rapid depreciation of the U.S. dollar, and thus dramatic appreciation of other currencies," Thai Finance Minister Chalongphob Sussangkarn told the annual meeting of the Asian Development Bank in Kyoto, western Japan.

Some Asian finance ministers voiced concerns over global imbalances -- a euphemism for the huge U.S. trade deficit and the large surpluses in Asia and oil-rich countries -- in their speeches to the ADB's annual meeting.

South Korean Finance Minister Kwon Okyu said global imbalances were their central concern.

"Any abrupt and disorderly unwinding of these imbalances may send a tremendous shock through the global financial markets," Kwon said.

If the dollar falls further on speculation that the U.S. trade deficit can be rectified only by a cheaper dollar that would give a headache to some Asian countries already nervous about the strength of their currencies.

Concerns that strength in the currency could sap exports and choke off growth pushed Thailand to take unusual capital control measures in December. Nevertheless, the Thai baht has continued to rally, hitting a 9 1/2-year high in March.

South Korea's Kwon also told Reuters in an interview on Sunday that the won's strength is a source of concern.

The ministers' comments came a day after Asian finance heads agreed on a new policy framework meant to cope with possible falls in Asian currencies rather than rises against others.

Ministers from ASEAN member nations and China, Japan, and South Korea -- the so-called ASEAN+3 -- agreed to pool part of their massive foreign reserves for common use to help avoid a repeat of the financial crisis that devastated the region a decade ago.

That may be a landmark in regional monetary cooperation, but many analysts think Asian countries will not need to make use of such a measure in the near future, given the huge amount of reserves these nations have amassed already.

The region's reserves have more than quadrupled to almost $3 trillion since 1997, when the region was hit by a wave of currency meltdowns.

While Asian finance ministers unanimously supported the new measure to "multinationalize" their currency defences, there may not be agreement on how to tackle global imbalances.

South Korea's Kwon also said there was another imbalance -- in the share of the burden of the fall in the U.S. dollar. That may be a possible swipe at Japan and China, whose currencies have not appreciated much against the U.S. currency in recent years.

The Chinese yuan rose about 7 percent against the dollar since it ended its peg against the dollar in July 2005.

In the same period, the Japanese yen weakened about 7 percent while the Korean won rose 13 percent.

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