Weaker currencies no cure for Asia's slump
By Kevin Yao Reuters
Published: February 26, 2009


SINGAPORE: Tumbling exports have prompted Taiwan and Thailand to push down their respective currencies, but an Asia-wide round of depreciation is unlikely because of fears it would hurt consumer spending and bring capital outflows.

Weaker currencies contributed to the region's export-led recovery from the 1997-8 financial crisis, but analysts say the current export slump has been caused largely by collapsing demand in the West, where economies are falling deeper into recession.

With Asian currencies expected to drift lower of their own accord as regional economies worsen, analysts say that most Asian governments are likely to resist the temptation to push their currencies much lower deliberately.

"I wouldn't expect a regionwide trend to try to weaken Asian currencies," said Sean Callow, currency strategist at Westpac in Sydney. "No one is going to export their way out of this slump, at least not within the next 12 months and probably longer."

Weaker currencies will make exports more price-competitive and bolster the bottom lines at companies like the Taiwan microchip maker TSMC by increasing their local currency income when they send U.S. dollars or euros home, keeping factories humming and people employed.
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But they will also make prices of imported goods in those countries more expensive, fueling inflation, as well as put pressure on the currencies of their Asian neighbors, creating a downward spiral. Further declines in Asian currencies could also see more overseas investors pull money out of the region. Stocks in Asia excluding Japan have fallen almost 60 percent since the start of 2008 amid a global market rout, spurring capital flight.

The political sensitivity of the regional currency issue was highlighted last week after China strongly denied reports that an official had suggested that the yuan might weaken to as low as 7 to the U.S. dollar, from about 6.38 in recent trade. The central bank has pledged to keep the yuan stable.

Still, signs abound that more Asian governments are looking to ease some of the growing strain on their economies by showing a greater tolerance for weaker currencies.

South Korea's new finance minister, Yoon Jeung Hyun, said Wednesday that the weaker won could help the economy, distancing himself from his predecessor's policies and suggesting an end to heavy official intervention to prop up the won.

The won lost 25 percent of its value last year and tumbled another 16 percent so far this year.

The won's sharp slide against the dollar may have persuaded Taiwan and Thailand to let their currencies soften, said Tim Condon, head of Asia research at ING.

"People look at what happened to the Korean won and say, 'Hey, I've got to get a little bit more competitive against the won,"' Condon said. "They have a sort of economic cover from the crisis in global markets to do something that is a little bit opportunistic, but will be of marginal benefit."

Central banks in Taiwan and Thailand have turned into dollar buyers in the past few weeks in an attempt to weigh their currencies down, which traders and analysts see as an effort to limit the damage from a double-digit plunge in exports.

The Taiwan dollar has lost about 7 percent since the start of 2008, but the island's exporters have lobbied for an even faster depreciation since exports plunged 44 percent in January. Taiwan's central bank urged importers Monday to hedge their foreign exchange positions, signaling that it was ready to let the currency weaken further, though government officials have publicly sounded a more cautious line.

Weakening the currency drastically is not the best way to save the economy, Chen Tain-jy, chairman of the cabinet-level Council for Economic Planning and Development, said recently. "If the Taiwan dollar were weakened too much, it would make imports more expensive and add more pressures to importers," Chen said.

Thailand seems to be taking a more gradual approach, with the Bank of Thailand expected to avoid sudden, aggressive action that could alarm already frail financial markets.

"At the moment, I think they will try push the baht lower step by step," said a currency trader in Bangkok, who declined to be identified because of the sensitivity of the issue.

In Singapore, the central bank is expected to depreciate the Singapore dollar in April by shifting its secret trade-weighted trading band moderately lower to help encourage growth. Singapore, Taiwan and Thailand are the most vulnerable economies in Asia because of their higher reliance on exports, though their currencies have held up relatively well despite the crisis.

The Singapore dollar has fallen 6 percent since the start of 2008, while the Thai baht has lost 6 percent.

rickfarang wrote:Its a race to the bottom. The last currency there wins.

Personally, the Baht dropping in value against the dollar is a temporary relief. Soon inflation will eat a good deal of the paper gain. We should enjoy it while we can.