The interests of Asia’s central banks may appear to be sharply at odds over the issue of the weak US dollar says an article in the Financial Times. After first indicating they were not worried about the rise of the yen against the dollar, Japan’s Finance Minister Hirohisa Fufii has now back tracked as Japanese exporters have been hammered by an exchange rate that has risen from nearly 120 to fewer than 90 to the dollar in just the last 2 years.
The South Korean won has fared even worse gaining 25% against the dollar since just March rising from 1,574 in March, to closing on Monday at 1,174. New Zealand and Taiwan are in the same position with the finance minister saying he hoped to get the Kiwi dollar from 72 cents on Monday back to 50-55 but admitting they had limited tools to do anything about it.
China, on the other hand, has pegged its currency to a basket which has allowed the USD/RMB to barely fluctuate around 6.83 since summer of last year. So one may imagine the Chinese are sitting pretty while the rest of SE Asia is hurting. Well yes in the short term they are, but in the longer run of course keeping the RMB low compared to their local trading partners will push up import costs and hence inflation. The only saving grace for the Chinese is much of the raw materials they import are in US dollars and so apart from commodity price inflation they will postpone importing inflation due to the currency for awhile. In the short term, China is benefitting from a currency held down relative to the rest of the world by its peg to a weak dollar. In the longer term, however their interest will be more aligned with the rest of SE Asia in looking for a stable dollar. With an economy growing at a brisk pace, China is more at risk than most to a return of inflation.