Is another foreign currency crisis on the horizon for Asia?

Posted on : 2022-09-27 17:38 KST Modified on : 2022-09-27 17:38 KST
Experts see little likelihood of global policy coordination to reverse current trends
US dollar and British pound notes (AFP/Yonhap)
US dollar and British pound notes (AFP/Yonhap)

Parallel declines in the value of the Chinese yuan and Japanese yen amid the continued strength of the US dollar have sparked warnings that Asian economies could end up facing similar pressures to those during the Asian financial crisis of the late 1990s.

The analysis is that while the trend would require global policy coordination to reverse, such cooperation is unlikely when the US — which should be taking the lead in that approach — is instead championing the “everyone for themselves” course of action.

In a report published Sunday, Bloomberg said the recent declines in the values of the yuan and yen could deal a blow to Asian markets on par with the Asian financial crisis.

The dollar has remained extremely strong as the US has taken “giant steps” by raising its key interest rate by 0.75 percentage points three times to rein in the worst inflation it’s seen in 40 years.

In contrast, China and Japan, the countries representing the world’s second- and third-largest economies, have adhered to a loose monetary policy approach.

China is being cautious about raising its interest rate in order to shore up a 2022 economic growth rate that appears likely to stay within the 5%–6% range. In Japan’s case, the approach is prompted by fears that doing so could throw cold water on its feeble signs of economic recovery.

As a result, the yuan-to-dollar exchange rate has fallen below 7, which had been regarded as a psychological “red line.” The yen-to-dollar exchange rate topped 145 at one point during trading last week.

“We’re already heading toward global financial crisis levels of stress in some aspects,” said Vishnu Varathan, head of economics and strategy at Mizuho Bank in Singapore.

“[T]he next step would be the Asian financial crisis if losses deepen,” he warned.

As a region, Asia stands to suffer a major blow if the yuan and yen become unstable. A bigger concern than the blow to real sectors such as exports and investments is the possibility of rapid capital outflows.

As international investors begin selling off their yuan and yen assets and buying dollar assets to take advantage of higher interest rates, the Chinese and Japanese economies suffer a blow in terms of declining exchange rates. But other countries that get caught in the middle and suffer capital losses could end up plunged into an economic crisis.

“Currency risk is a bigger threat for Asian nations than interest rates,” explained Taimur Baig, chief economist at Singapore’s DBS Group.

“At the end of the day, all of Asia are exporters and we could see a reprise of 1997 or 1998 without the massive collateral damage,” he added.

Jim O’Neill, a former chief currency economist at Goldman Sachs, predicted the possibility of turmoil on par with the 1997 Asian financial crisis if the yen-to-dollar exchange rate tops 150. In particular, he named the South Korean won alongside the Philippine peso and Thai baht among the most vulnerable currencies.

On Thursday, the Bank of Japan made its first exchange market intervention in 24 years in order to stop the exchange rate’s decline. The People’s Bank of China raised the risk reserve ratio for forward foreign exchange sales on Monday from 0% to 20%. This move is being interpreted as an attempt to stop sales of the yuan by raising the costs associated with selling yuan-denominated futures.

But with the effects of the strong dollar not being limited to any one region, the individual responses are yielding little in the way of results. Japanese media unanimously concluded on Friday that the prospects for the foreign exchange interventions were “uncertain” (Asahi Shimbun) or “unclear” (Yomiuri Shimbun).

At the same, the likelihood of policy cooperation does not appear high.

George Boubouras, head of research for the hedge fund K2 Asset Management, said, “It’s an ‘every man for himself’ scenario right now.”

“The chances of global coordination to weaken the dollar are close to zero,” he predicted.

By Cho Hae-yeong, staff reporter

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