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Strategies & Market Trends : Asia Forum -- Ignore unavailable to you. Want to Upgrade?

To: DMaA who wrote (741)	1/12/1998 6:23:00 PM
From: Stitch	Read Replies (2) \| Respond to of 9980

David, It is exactly this kind of "pegging" that has been a source of trouble in Asia. Companies in the worst-hit countries, South Korea, Indonesia and Thailand, borrowed vast sums of money as their economies boomed. Worse, they borrowed much of it in US dollars because interest rates were much lower than those in their own currencies. The exchange rates of local currencies were pegged against the dollar, so they had no fears about having to earn money in local currency to pay back loans in dollars. This was fine while the economy was booming. But from the middle of 1995, the US dollar started to rise against most of the world's other currencies. Asian currencies pegged against the dollar rose with it-so Asia's exports became more expensive and less competitive on world markets. Account balance deficits rose as demand for cheaper imports grew while more expensive exports declined. In 1996 Thailand's export growth, which had been a model for the region, dropped to nearly zero ballooning the current account deficit. From around May of 1997 it had started to become apparent to traders that Asian currencies would have to abandon the dollar peg and devalue in order to revive exports. There was much resistance. Devaluation would cripple firms which had borrowed huge sums in dollars and would now have to earn much more in local currency to pay back the loans. Most of this resistance took the form of government programs to buy local currencies and sell U.S. dollars, a strategy that in hind sight, compounded the cost and was doomed from the start. As central banks lost billions, investor confidence worsened. On July 2nd Thailand was forced to capitulate and allow the baht to float freely on the market. The slide in value drew scrutiny to other Asian economies where similar circumstances were found, prompting a spreading crisis now popularly called the "Asian contagion" in the press. Since July 2nd, Asia's stock and currency markets have been in turmoil as one country after another grappled with the erosion of investor confidence in the region's economies. Currencies in the Philippines, Malaysia, Thailand and Indonesia lost more than one-third of their value against the US dollar this year. Banks were particularly hard hit because the drop in the value of Asian currencies caused the cost of debt for companies with foreign loans to explode. Sankar can give a better account of a more attractive monetary policy then I but clearly "pegging" currencies has not been good policy for Asian countries. Best, Stitch

To: DMaA who wrote (741)	1/18/1998 2:15:00 PM
From: Rational	Respond to of 9980

David: I am sorry to get this late to your message. Setting an exchange rate by a pure CB fiat (as in China) or by the market (as in most developed countries) or by a mixture of fiat/market (as in India) or by a currency board (Argentina/HK) exploit the same underlying principle: the true economic value of one currency relative to another. The market can and does screw up the prices (as in Europe, Latin America and now in Asia) as badly as a government fiat. I feel the currency board, which links the exchange rate to price of a basket of goods and services in two countries, is an ideal mechanism as long as the basket of goods and services is representative -- but there are a lot of controversies about a basket of goods and services as you may have heard concerning the US CPI being overstated. But, no matter how a country sets her exchange rates, the final rate will be dictated by pure supply and demand which are unfortunately not purely related to economics; there are socio-political factors. For example, the minorities in Indonesia are selling all their rupiah because of a fear of social unrest, while the rich and famous have huddled their wealth in US$. I feel the current currency run in SE Asia is related to fear and greed, not to the underlying economic fundamentals. I see a great risk to the US$ in terms of a loss in value because of over-optimism about the safety attributed to this currency, completely out of line with the fundamentals. US is the largest debtor nation and has the largest current account deficits with ballooning trade deficit -- these fundamentals are worse than that in SE Asia. The budget deficit will rise once the corporate profits dwindle. Yet, US$ had been gaining steadily becase of the safe-haven status it enjoys. [In fact a few weeks ago I had predicted that the rising US$ should/would/must fall to restore an equilibrium. Not many then believed that this would happen. It has happened sooner than I had thought, although I am not sure if a trend has formed yet.] Earlier US$ was losing in value when Asia was considered to be developing fast. Assuming that the loss of confidence in SE Asia has reached the nadir, capital is likely to flow back to Asia and other countries from where it flew out in line with economic fundamentals. My greatest fear is political upheaval in the US over the trade deficit and Asian dumping once the Congress resumes its session in the last week of January. Sankar <<Argentina and Hong Kong both have currency boards whose goal is to peg the value of the local currency to the US$. I have heard voices lately advocating this approach for other countries. My question is, if this practice became wide spread, are there any risks Americans should be aware of for our economy and/or currency? From a strictly selfish American point of view is this a good, bad or indifferent thing.>>