ASEAN economies could get reprieve if dollar stays down
ASEAN economies could get reprieve if dollar stays down
SINGAPORE (Dow Jones): Southeast Asian economies could get a reprieve from global pressure, following the sharp drop of the U.S. dollar on currency markets, economists said.
But the question remains whether the dollar is out for the count or will return quickly to fighting trim.
If the dollar's weakness takes root, it could allow crisis- stricken countries to boost their economies by cutting domestic interest rates, but some analysts warn there are also pitfalls to a weak U.S. dollar. "That, in general, is good news," said Friedrich Wu, chief economist for Development Bank of Singapore Ltd. "This is assuming, of course, that this will develop into a trend in the next couple of months and it's not just a short-term aberration."
"The weakening of the U.S. dollar has left Asian currencies with a firmer bias, but they look to be following with a considerable lag," Standard Chartered Bank in Singapore wrote in a report Thursday.
Wu at DBS said if the yen remained strong against the U.S. dollar, it could help spur demand in Japan, boosting exports to the country from the region.
He said the impact on overall exports from the region would be relatively small, because a credit crunch and problems in trade finance have kept Southeast Asian companies from taking full advantage of their countries' weaker currencies.
David Bain, Asian economist for Schroder Investment Management in Singapore, said currency stability was more important to regional recovery than sharp swings in either direction.
"What this region needs is currency stability, and not these movements all over the place," he said. "It (the yen's strength) is not backed up by fundamentals. I can't imagine that the Japanese are going to come out with anything revolutionary."
He said he expected the U.S. dollar to recover, which would continue the recent volatility on foreign-exchange markets.
"There's currency weakness out there," he said, "but the big proviso is what's happening with the U.S. dollar."
Standard Chartered bank was also skeptical about the weakened U.S. dollar's benefits.
"Indeed, the weakened U.S. dollar does little to aid the outlook for Asia, coming as it does in part from a deteriorating outlook for the U.S. economy," its report said.
Bain noted one benefit from the weakening dollar was that it took pressure off the Chinese yuan and the Hong Kong dollar's peg to the U.S. dollar. Analysts have feared that a devaluation of the yuan would trigger a fresh bout of trouble for the region.
The central bank has already started to reduce interest rates and will continue to do so," said Didik Rachbini, economist at the Institute for Development of Economics & Finance in Jakarta.
As for Malaysia, the surge of the regional currencies can only be positive, economists said.
Since the beginning of September, the ringgit was effectively pegged at 3.80 ringgit to the dollar as the government imposed foreign-exchange curbs that closed the capital account.
Prime Minister Mahathir Mohamad recently raised the possibility that the ringgit (MYR) might be devalued if the value of other Southeast Asian currencies were to be eroded dramatically.
With the dollar's decline against the region's currencies, analysts said, Malaysia has the added advantage of a more competitive exchange rate, and export volumes could pick up.
"There was some concern when the peg was first introduced that it was a bit high and may need to be adjusted," a local economist at a brokerage house said. "But any change would have undermined the whole point of the capital controls.... This rally in the currencies, for Malaysia, is good news."