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Leading Asian economist urges joint action on dollar

Section: Daily Dispatches

12:32p ET Friday, Decmeber 8, 2006

Dear Friend of GATA and Gold:

An abbreviated version of the story appended here was dispatched to you a few hours ago and it was without full attribution to The New York Times.

CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.

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Leading Asian Economist
Urges Joint Action on Dollar

By Keith Bradsher
The New York Times
Friday, December 8, 2006

HONG KONG, Dec. 7 -- A senior Asian Development Bank official said on Thursday that the dollar was likely to decline further, and he called for East Asian countries to make sure that their currencies rose in unison and did not gyrate.

The remarks by the official, Masahiro Kawai, represented the first time that the bank — or for that matter, any important monetary institution in Asia — had urged collective action by East Asian nations to manage the current slide of the dollar. National monetary authorities in the region together hold more than $3 trillion in foreign reserves, most of it in dollars, and their huge purchases of dollars this year have played a crucial role in limiting the American currency’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, Mr. Kawai said. "It's very important for the East Asian currencies to appreciate collectively against the U.S. dollar."

He said further that China had accumulated excess foreign exchange reserves by intervening in the market to hold down the value of its currency, known as the yuan or the renminbi. Large foreign exchange reserves in China -- they exceeded $1 trillion in October, according to the official news media -- and elsewhere in East Asia are also making it harder for countries to control their own monetary policies, and they run the risk of incurring losses in the management of these reserves, Mr. Kawai said.

"If there had been no foreign-exchange market intervention," he added, "the renminbi would have been appreciating at a much faster rate."

That stance is likely to be welcomed and echoed next week by Treasury Secretary Henry M. Paulson Jr. when he travels to Beijing with Ben S. Bernanke, the Federal Reserve chairman, and a delegation of cabinet officials.

Mr. Kawai is one of Japan's most influential economists and has served as an adviser to the Federal Reserve, the International Monetary Fund and the Japanese central bank, as well as chief economist for East Asia and the Pacific at the World Bank.

Though he cautioned that the Asian Development Bank was not making its own forecast on the value of the dollar, Mr. Kawai said that the consensus among economists was that the American current-account deficit -- the broadest measure of trade -- could be substantially trimmed only if the dollar declined by an average of 30 to 40 percent when weighted by the portion of American trade conducted with each country.

If their currencies appreciate together, Mr. Kawai said, East Asian economies can withstand a 20 percent decline before the weakening dollar makes their exports too expensive. The United States accounts for no more than a fifth of the exports of even the biggest Asian exporters, he said.

So even if the value of the dollar declined 20 percent, and East Asian currencies moved as a bloc, Mr. Kawai said, the trade-weighted appreciation would be only about 4 percent — a fifth of 20 percent. That, he said, would be manageable.

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.

Currency experts said that while the coordination suggested by Mr. 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.

If the dollar looks as if it is certain to slide, then the central bank that sells a large chunk of its dollar reserves first may preserve a greater share of the value of its foreign currency holdings than other central banks in the region who sold later. But if every Asian central bank rushes to sell dollar reserves at the same time, then the value of all their reserves and the dollar would drop sharply, said Dariusz Kowalczyk, a currency analyst at CFC Seymour, a Hong Kong securities company.

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 American markets, then the result could be a broad weakness in Asian currencies and a rapid accumulation of foreign exchange reserves. Many economists say this is what is already happening.

The South Korean won fell in Asian markets on Thursday when Finance Minister Kwon Okyu expressed concern about the currency's strength. But while the won has been rising against the dollar, it has in fact fallen by 2 percent against the euro since mid-October, when the dollar's weakness became more apparent, said Ben Simpfendorfer, a Royal Bank of Scotland currency strategist in Hong Kong.

Mr. Kawai did not spell out how Asian countries should cooperate in managing the rise of their currencies against the dollar.

Finance ministers from the 10 members of the Association of Southeast Asian Nations will gather Friday on the Philippine island of Cebu for the start of a series of meetings that will culminate next Wednesday in a meeting of heads of state and government of China, Japan, South Korea and Asean countries.

Asian governments have shown more interest lately in cooperation in general, although that cooperation has not yet extended to monetary policy.

"It would be very difficult to achieve such coordination," Mr. Kowalczyk said. "However, we have seen Asia coordinate in some areas where they normally compete, such as when India and China bid for foreign energy assets."

An intriguing aspect of Mr. Kawai's remarks lies in whether his comments on Chinese currency intervention, excess Chinese foreign exchange reserves, and a need for Asian currency cooperation may reflect the unspoken views of his former colleagues at the Japanese finance ministry and the Japanese central bank.

China's central bank has allowed the yuan's annual pace of appreciation against the dollar to double, to 6 percent, since Mr. Paulson's last visit to Beijing on Sept. 22. But the dollar has been falling even faster in global currency markets.

So the yuan has been weakening against the yen and the euro, making Chinese goods even more competitive with Japanese and European products in their home markets and around the world.

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