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Asian Development Bank official urges management of dollar's fall
By Keith Bradsher
International Herald Tribune, Paris
Thursday, December 7, 2006
HONG KONG -- A senior Asian Development Bank official predicted Thursday that the dollar was likely to decline further and called for East Asian countries to make sure that their currencies appreciate in unison -- and do not start swinging sharply in value relative to one another.
The remarks by the official, Masahiro Kawai, represent the first time that the multilateral bank -- or for that matter, any prominent Asian monetary institution -- has urged collective action by East Asian countries to manage the current slide of the dollar.
The East Asian monetary authorities together hold more than $3 trillion in foreign exchange reserves, most of it in dollars, and their large purchases of dollars this year have played a crucial role in stemming the dollar's decline until now.
"We believe that some U.S. dollar depreciation would be necessary and collective joint appreciation of the East Asian countries could be needed" to manage the decline, Kawai said. "It's very important for the East Asian currencies to appreciate collectively against the U.S. dollar."
Kawai also said that China had accumulated excessive foreign exchange reserves by intervening in markets to hold down the value of its currency, known as the yuan or renminbi.
Oversized foreign exchange reserves in China -- they exceeded $1 trillion in October, according to the state news media -- and elsewhere in East Asia are also making it harder for countries to control their own monetary policies and run the risk of incurring losses in the management of these reserves, Kawai said.
"If there had been no foreign exchange market intervention, the renminbi would have been appreciating at a much faster rate," he added.
That stance is likely to be welcomed and echoed next week by the U.S. Treasury secretary, Henry Paulson Jr., who will be in Beijing next week with Ben Bernanke, the Federal Reserve chairman, and an unusually large delegation of cabinet officials.
Currency experts said that while the coordination suggested by Kawai would be useful, it would be hard to achieve given the competing interests of countries in the region, their differing relationships with the United States, and their varying domestic economic challenges.
Kawai was the deputy vice minister of finance for international affairs in Japan from 2001 to 2003. He is now the special adviser to the president of the Asian Development Bank and is the head of its office of regional economic integration.
Kawai said the consensus of economists was that the dollar would need to decline by 30 percent to 40 percent in trade-weighted terms in order for the United States to trim substantially its current account deficit -- although he cautioned that the Asian Development Bank was not making its own forecast for the value of the dollar.
East Asian economies can withstand a 20 percent decline in the trade-weighted value of the dollar provided their currencies appreciate together, Kawai said. The U.S. market accounts for no more than a fifth of the exports of even the biggest Asian exporters, he noted.
So if East Asian currencies kept roughly the same value against each other and currencies other than the dollar, their overall, trade-weighted appreciation would be no more than 4 percent in this outlook -- a fifth of 20 percent, Kawai said. This would be manageable, he added, while cautioning that the Asian Development Bank already expected a slight slowing of growth in East Asia next year because of slowing growth in exports, especially to the United States.
East Asian economies "can cope with a significant appreciation vis-à-vis the United States if it's managed in an appropriate way," he said.
Yet currency experts point to difficulties in achieving that goal.
If the dollar seems certain to fall, then a central bank that sells a large part of its dollar reserves first might preserve more of the value of its foreign exchange reserves than other central banks in the region. But if every Asian central bank rushed to sell dollar reserves, then the value of all their reserves and the dollar would drop sharply, said Dariusz Kowalczyk, an analyst at CFC Seymour in Hong Kong.
The opposite approach could also be a problem: If each Asian country tries to prevent its own currency from rising against the dollar so as to preserve the competitiveness of its exports in U.S. markets, then the result could be a broad weakness in Asian currencies and a rapid accumulation of currency reserves. Many economists say this is what is already happening.
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