Shift in Asian currency strategy to fight inflation

Shift in Asian currency strategy to fight inflation

May 29, 2008
AFP

WASHINGTON, US - EXPORT- DRIVEN Asian economies are shifting away from a strategy of keeping currencies weak against the US dollar in an indication of troubling times for the region, a US think tank said on Wednesday.

Central banks in Indonesia, the Philippines, Taiwan and South Korea on Tuesday reportedly began selling dollars to shore up their currencies to fight inflationary concerns stemming from surging oil prices.

'The currency-strengthening move undertaken by the central banks Tuesday is a shift in policy,' Mr Stratfor, a US-based private intelligence service, told its corporate clients in a bulletin on Wednesday.

It raised the spectre of the 1997 Asian financial crisis, when currencies in the region plunged and sent economies reeling into turmoil, the think tank said.

'While the events on Tuesday do not necessarily signal the beginning of another crisis, they certainly show that at least a few East Asian countries have hit some sort of threshold,' Mr Stratfor said.

'They can no longer keep up with rising commodity prices,' it said.

While Indonesia, the Philippines, Taiwan and South Korea are lower- and mid-level economies in East Asia, 'the decisions by their central banks are important, especially as a sign of what may come,' it warned.

By moving to strengthen their currencies, the Asian economies are attempting to makes imports cheaper and contain the inflationary effects of soaring oil and other commodity costs, experts say.

Typically, Asian countries keep their own currencies weak to keep their products at lower prices which translates into higher demand from foreign markets, supporting the export-centric economies.

But Mr Stratfor pointed out that this system worked best when the dollar was strong and the price low for raw material like minerals, including oil, building supplies and food.

Right now this is not the case - oil has skyrocketed to about US$130 (S$177) per barrel and grain prices are also at record highs and raw materials in fierce demand, hurting the largely manufacturing economies in the region.

Mr Stratfor also pointed out that 'the real pain' from high commodity prices was not necessarily being felt by the countries that reportedly tinkered with their currencies on Tuesday, but by China and Thailand, which operate the most manufacturing-dependent economies in the region.

In China, it said, the high cost of raw materials and energy was further shrinking already-tight profit margins. In addition, rising cost of food can quickly lead to social upheaval in the world's most populous nation, it said.

China has allowed its yuan currency to strengthen gradually against the dollar but Mr Stratfor said if China suddenly ramped up the yuan, it risked shuttering factories that depend on exports and thus increasing unemployment.

It also runs the risk of devaluing a significant portion of the approximately US$1.7 trillion in savings it holds in foreign exchange reserves.

'Ultimately, these actions - and those taken by the central banks Tuesday - do not change the fact that China, like all manufacturing-heavy economies, is in for some challenging times ahead,' Mr Stratfor warned. -- AFP