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Currency bickering risks recovery
blackouts
By Gary LaMoshi
HONG KONG - Power outages in the northeastern
United States that left millions in the dark in early
August gave most people their first glimpse into the
complex world of the electrical grid.
Employing
physics, engineering and relationships far beyond the
understanding of the uninitiated, the grid smoothly
balances output and demand from an unmatched set of
suppliers and users, unseen and unappreciated. When
there's a disruption in the grid, though, it's hauled
out of the shadows and gets the blame for suffering
that's acute and widespread.
In international
finance, currency markets play the role of the grid.
This week, there's a disruption, currency values are
back in the spotlight, and many are feeling the pain.
It's not a currency crisis
For
veterans of the 1997 economic crisis in Asia, exchange
rates are never hidden too deeply in the shadows. It was
the Bank of Thailand's decision to stop supporting the
baht's link to the US dollar that led to suffering that
was acute and widespread, and still is in some
precincts.
Some experts, however, noted that it
wasn't really a currency crisis that unleashed Asia's
financial blackout. It was a debt crisis. Or, other
experts said, it was a confidence crisis. Artificially
fixed exchange rates produced currency values that no
longer reflected economic fundamentals, creating
distortions that turned out the lights in the tiger
economies.
On Saturday, from the site of their
meeting in Doha ahead of International Monetary Fund
(IMF) talks, finance ministers of the Group of Seven
(G7) rich countries issued a reminder on that very
point: exchange rates need to be flexible to reflect
economic fundamentals. The ministers should have also
included reminders to stock up on candles and batteries.
When markets opened on Monday, the yen
zoomed higher and Tokyo stocks plunged 4 percent, their
biggest one-day dive in two years. The US dollar
weakened (that's the flip side of a stronger yen, since
it's stronger in terms of its value in dollars), taking
its lumps against the Korean won, the euro, and
virtually every other currency on the globe.
Yen for dollars
The G7 statement has
the fingerprints of the US administration of President
George W Bush all over it (and it seems to have worked
as well as most of its economic initiatives to date). US
Treasury Secretary John Snow spent much of his recent
swing through Asia scolding Tokyo and Beijing for
keeping their exchange rates too low.
In the
year through July, the Bank of Japan (BOJ) had forked
out some 9 trillion yen (US$81 billion) to keep the yen
trading for more than 115 to the greenback. On Monday,
with the BOJ apparently not intervening in the market as
the newly minted Finance Minister Sadakazu Tanigaki got
his name cards printed, yen rates strengthened to trade
below 112, a three-year high.
The stronger yen
may threaten Japan's fledgling recovery (see Japan is back, and Koizumi rules,
September 23) by making its exports less competitive.
Stock market traders dumped shares in exporters that
figured to see lower profits. The smart money - in any
currency - expects Japan to resume selling yen to move
exchange rates back down. But this week's violent market
moves shattered any sense of stability, which will breed
further volatility that mainly benefits speculators.
The dollar even weakened against China's
non-convertible yuan. Yuan futures rose to reflect a 3
percent move in the pegged exchange rate of 8.28 yuan to
the dollar in the months ahead.
For more than a
year, Japanese and European Union officials, as well as
Snow in Beijing this month, have appealed to China to
revalue its non-convertible currency to slow the flood
of imports into their countries. Ironically, in the
aftermath of the 1997 collapse, industrialized nations,
led by the United States, pleaded with China not to
lower the yuan's exchange rate to avoid a cycle of
competitive devaluations across Asia.
Careful
what you wish for
US stock markets fell more than
1 percent on Monday after the apparent success of this
latest Bush administration economic initiative before
recovering some on Tuesday. But wait, it's a good idea.
A weaker dollar would make US export products more
competitive. That, in turn, should lead to more output
and more jobs. So far, so good.
But a weaker
dollar means that overseas investors may become
reluctant to put their money in the US, and the US needs
their money, to the tune of $1.5 billion a day, to
finance its current-account deficit. The latest
quarterly report from the Treasury Department indicates
overseas investors bought 80 percent, or $172 billion,
of the debt it issued in the second quarter. With the
federal budget deficit rising, Uncle Sam will be looking
for more of foreigners' money in the quarters ahead.
A weakening dollar encourages investors to look
into alternatives, such as EU securities, and/or to
demand higher interest rates to compensate for the
currency risk. Higher interest rates would dampen US
investment across the board and endanger economic
recovery. Exports, beneficiaries of the weaker dollar,
represent less than 10 percent of US output.
Sore winner
For some time, one faction
of economists has been warning that US requirements for
overseas funding to maintain itself in financial style
were incompatible with the record-low interest rates of
the past two years. However, the strong dollar has kept
overseas money pouring in. Complaining about the
weakness of other currencies made the United States a
sore winner.
This year, currency traders began
to dump the dollar, as that economic faction would have
predicted. Still, the Treasury report shows, overseas
money continued to come Uncle Sam's way, apparently
valuing the dollar's stability above nominally higher
returns. Markets know what they're doing, the economists
tell me.
The Bush administration's moves to
weaken the dollar ask currency traders to believe the
government's logic instead of the market's. Moreover, a
weaker dollar puts the delicately balanced double
happiness of low rates and high inflows at risk.
It's as if, when the lights flickered, the Bush
people sent John Snow up the electric pole with a pair
of wire cutters.
(Copyright 2003 Asia Times
Online Co, Ltd. All rights reserved. Please contact content@atimes.com for
information on our sales and syndication policies.)
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