Asia Is Getting Ready to Dump the Dollar Peg

Discussion in 'Economics' started by wincorp, May 8, 2006.

  1. wincorp


    Asia Is Getting Ready to Dump the Dollar Peg

    May 8 (Bloomberg) -- Li Yong, China's vice minister for finance, said he had heard a ``rumor'' that the U.S. dollar was headed for a 25 percent drop. If the gossip was true, the consequences would be ``shocking,'' he said.

    Li's comment, which he made at a discussion on global financial imbalances last week at the annual meeting of the Asian Development Bank in the Indian city of Hyderabad, was aimed directly at fellow panelist Tim Adams, the U.S. Treasury undersecretary of international affairs.

    The unspoken message was: ``Don't try to talk the dollar down.'' And Adams knew better than to ask, ``Well, what are you going to do about it?'' The answer to that question has already begun taking shape: Asia may be getting ready to fix its currencies to a local anchor, dumping the region's unofficial dollar peg.

    Even as they continue to pile up U.S. debt in their foreign- exchange reserves to keep their currencies stable against the dollar, Asian nations, China among them, are preparing for a scenario where the dollar does indeed collapse under the weight of a record U.S. current account deficit.

    At the Hyderabad meeting, finance ministers of China, Japan and South Korea got together with their counterparts from the Association of Southeast Asian Nations, or Asean. The 13-nation group said it would sponsor a research project, titled ``Toward greater financial stability in the Asian region: Exploring steps to create regional monetary units.''

    Asian Currency Unit

    This is no innocuous academic exercise. Regional monetary units are a euphemism for a parallel Asian currency, an idea that has been around since the 1997-98 financial crisis and is now, for the first time, entering the realm of policy making.

    Both Japan and China are extremely serious about it and are vying to take ownership of the project.

    An Asian Currency Unit, or ACU, will be an index that seeks to capture the value of a hypothetical Asian currency by taking a weighted average of several of them. The weight for a particular currency in the index may be determined by the size of the economy and the quantity of its total trade.

    What's the big deal with the ACU? Given the data, anyone can set up an index. It isn't that Asia is talking about replacing its national currencies with the ACU. A European-style single currency in Asia is at least decades away. The ACU is an accounting unit; it won't change hands in the physical world.

    The ACU will start making a difference when it becomes the fulcrum of exchange-rate management in Asia. There is some sign that Asian nations want to do just that.

    A New Peg

    Korea, Japan and China agreed in Hyderabad to ``immediately launch discussions on the road map for a system to coordinate foreign exchange policy.''

    The ACU can help a lot in such coordination. It can become a basket peg against which any Asian nation can fix the value of its currency within a band. The ACU, itself, will float.

    Why might the ACU work when the now-defunct European Currency Unit, on which the concept is modeled, didn't? One good reason, as noted by economist Barry Eichengreen of the University of California, Berkeley, is that Europe's need for a parallel currency was satisfied by the dollar.

    The ACU may well emerge as a viable currency for denominating export invoices, bank loans and bond issuances if the dollar is no longer perceived as a safe storage of value.

    So far, Japan has been driving the ACU concept. Haruhiko Kuroda, a former Japanese vice minister of finance and currently the president of the Asian Development Bank, was vigorously pursuing it. The ADB was going to start computing and publishing several ACUs sometime this year.

    China in Control

    One such ACU would have comprised 13 members, including the Japanese yen, the Chinese yuan, the Korean won and the currencies of Singapore, Malaysia, Thailand, Indonesia, Brunei, Vietnam, Cambodia, Laos, Myanmar and the Philippines. Another ACU would have included both the yuan and the Taiwan dollar -- and that would have been anathema to China. Nor would China have liked to peg the yuan to an ACU that was overly dominated by the yen.

    Now China has taken control. While the research will still be conducted in Japan, Asean will take the decision on the composition of the ACU. While Japan is a member of this club, its influence is in decline. The association is now firmly under China's thumb.

    While China continues to exhort the U.S. not to follow weak- dollar policies, it, like everyone else, can only guess about the longevity of the present global imbalances.

    If there is a sudden collapse in the dollar, the U.S. appetite for imported goods may vanish. The Chinese export engine may seize up and its fragile banking system may collapse under a spate of new bad loans. The idea behind the ACU is to buy some insurance, however inadequate, against all of this.


    With its ``my currency is your problem'' attitude, the U.S. has made a negotiated settlement of global imbalances a diplomatic non-starter. China isn't willing to consider the U.S. argument that quicker appreciation of the yuan may prevent a costly adjustment later.

    Once again in Hyderabad, Undersecretary Adams tried valiantly to get this message across to Chinese Vice Finance Minister Li. He was wasting his breath.

    Li, as Adams noted wryly, ``knows all my talking points.''
  2. TGregg


    Combine currencies to delay the inevitable decline in the dollar? Yikes. One can put neosporin on a cut early, wait and cut off an infected finger, but why do that if you can wait even longer and chop off your arm?

    But I guess for the people currently in charge, well they won't be when somebody else's arm gets lopped off.
  3. Creates a lovely opportunity to ride up the equity markets as they go bonkers and then sell out into foreign assets / hards in such a situation, does it not?
  4. China and Japan, which manipulate their own currencies as part of their merchantilist economic management, want to limit their vulnerablility to manipulation by their regional neighbors. All of course will continue to pursue policies that support an artificially high dollar.

    Unfortunately, all chickens eventually come home to roost, even those who have been playing the financial version of chicken. Either they will lose on their dollar holdings, or they will lose on their bond holdings (which they buy to boost the dollar) or they will suffer a horrifying depression. Not pretty and the longer it goes on, the bigger the mess.
  5. Interesting post ... thanx
  6. Chagi


    I'm sort of wondering at times if the US deliberately wants their dollar to decline in value. The problem I see with this concept is that doing so would increase the cost of oil in the short term, but I think this also places pressure on China.

    A declining dollar is not good for Asia.
  7. Xenia


    Asian common currency not to come in short term!

    VNECONOMY updated: 24/02/2006

    By Minh Duc - Kieu Oanh

    It is now too early to talk about issuance of an Asian common currency despite increasing economic independence between countries in this region. Many mistake the Asian Currency Unit (ACU) which will be launched by the Asian Development Bank (ADB) in March or April this year for an Asian common currency (note or coin). Such an understanding views the ACU similar to the euro which is circulating in the world. ADB representative at Manila (Philippines) headquarters talked with VnEconomy about this issuing plan.

    - The Asia Development Bank (ADB) has just announced a plan to issue the Asian Currency Unit (ACU). Could you be more specific about this issuance?

    The trend of individual Asian currencies vis-à-vis the US dollar, the euro, or the yen, is well known. However, while economic interdependence in Asia is rapidly increasing, it is still difficult to observe how Asian currencies are moving against each other and how Asian currencies as a whole are moving against external currencies, such as the US dollar, the euro, or the British pound. We intend to calculate an Asian Currency Unit as a weighted index of East Asian currencies in order to create a regional benchmark to monitor such trends.

    ADB is currently reviewing different options concerning the technical aspects related to ACU calculation, including the nature of the basket, the choice of fixed weights vs. fixed units, the selection of currencies to be included in the basket, the choice of weights, the criteria for their periodical revision, and other aspects as well. After completing an internal review of these technical aspects, we expect to post several indexes for ACU on the ADB website in the next few months.

    - The ACU is considered as an instrument to supervise value changes of the currencies in the region. So could it be understood that the ACU will have large impact on monetary policy of member countries?

    An ACU would create a regional benchmark to monitor the movements of Asian currencies. Each country will be free to make use of the ACU statistical index as it sees fit.

    - Is the ACU premise for an Asian common currency in the future? If it is, could you forecast when will the common currency be introduced?

    The proposed ACU is not an “Asian currency”. ACU is just a statistical index and does not function as “money”, at least for the foreseeable future. Asian countries can learn several lessons from the creation of the European Currency Unit (ECU), especially in relation to the technical aspects determining the construction of the ACU basket. While Europe created the Euro as a European common currency twenty years after the birth of the ECU, it is definitely premature to envisage the creation of an Asian common currency in the near future.
  8. Bickering delays Asian currency unit launch
    By Victor Mallet in Hong Kong
    Published: March 26 2006 20:09 | Last updated: March 27 2006 05:15

    Plans to launch an Asian Currency Unit (Acu) to help develop regional bond markets and promote monetary co-operation have been delayed by political and technical arguments over which currencies to include and how the weighting system would work, say people familiar with the project.

    "There is agitation over which currencies are to be in the Acu," said one official at the Asian Development Bank, citing disagreements among Asian governments over the incorporation of the currencies of Taiwan – the island claimed by China – and of Hong Kong, Australia and New Zealand.

    Haruhiko Kuroda, the ADB's Japanese president, strongly supports increased financial co-operation in Asia and an eventual monetary union. He had hoped to launch the Acu as early as this month but ADB officials now say the process is unlikely to be completed until after the bank's annual meeting in May.
  9. This stuff sounds awfully familiar to the calls for the US to become a banana republic back in late 2004 as the EUR hit 1.36 and change.
  10. Personally I think it's all talk because of the decline in the Dollar.
    #10     May 9, 2006