By Jeremy Warner, UK Telegraph October 8th, 2009
So much for the G20’s commitment to tackling trade and capital imbalances. Asian central banks have reportedly begun to intervene heavily in foreign exchange markets to support the sickly dollar.
The reason? They are worried about what the weak dollar might do to exports. They also worry about the damage the shifting exchange rate does to the portfolio value of their foreign exchange reserves, which are largely held in dollars. There’s very little appetite among the big surplus nations of Asia for the correction in imbalances the IMF thinks desirable, nor, despite international lip service to “sustainable and balanced growth”, is there any centralised mechanism for ensuring it comes about.
To the contrary, public policy across the globe to fight the recession conspires only to make the imbalances worse. Exceptional monetary, fiscal and financial system support in America and elsewhere may be necessary to prevent the world from falling into a second Great Depression, but the extreme excess of liquidity thereby created also sets the scene for fresh bubbles in consumption and asset prices in the advanced economies.
One of the most well used mantras doing the rounds at the annual meeting of the International Monetary Fund in Istanbul last weekend was that policy makers should be careful “not to waste a good crisis”. By this is meant that there is nothing like adversity to concentrate collective minds on necessary reforms and provide the will to drive them through.
But with the immediate crisis now over, that will is already waning. The big surplus countries have in any case never accepted the case for immediate and fundamantal change. Yet perhaps they do accept the inevitability of gradual change.
As everyone knows, central bank intervention in the currency markets is a bit like spitting against the wind. No amount of it will halt market sentiment in full flood. Rather the purpose of the present intervention seems be to slow the pace of decline in the dollar, giving export industries more time to adapt to changing dynamics.
There has been much talk of the death of the dollar in recent weeks, but the fact of the matter is that Asia isn’t yet quite ready for it. It will be ten years or more before China is fully weaned off its dependence on the American consumer. We can only pray that this addiction doesn’t provoke another crisis before the habit is finally kicked, for the Western world has been so fiscally damaged by the one just passed that it cannot afford another.
UPDATE:
One of the reasons for the weak dollar is growing confidence in the Asian growth story. This is encouraging dollar borrowing – interest rates are still at rock bottom in the US and likely to remain there for some time – to invest in higher yielding Asian assets. Pre-credit crunch, everyone thought that “carry trades” of this sort were the big risk to the stability of the financial system. In the end, the nemisis came from an entirely different direction – US sub-prime mortgage lending. Yet it’s never too late for the carry trade to wreak the predicted havoc.
http://blogs.telegraph.co.uk/finance/jeremywarner/100001309/asia-acts-to-support-the-downcast-dollar/
