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Strategies & Market Trends : HONG KONG -- Ignore unavailable to you. Want to Upgrade?

To: WONG who wrote (2647)	1/11/1999 5:13:00 PM
From: Tom	Read Replies (1) \| Respond to of 2951

USD down pretty good today. The News México City, January 11, 1999. FED FACING INCREASING SOFT DOLLAR PERILS, FEARS By Sarah Davidson Reuters HONG KONG -- The world's most important central banker arrived in Hong Kong on Sunday with Asian stock markets sizzling, but Federal Reserve Chairman Alan Greenspan's visit comes as unease grows about a key driver of the rally -- a soft U.S. dollar. "Ultimately, I believe the weak U.S. dollar policy tied to easier monetary policy is not sustainable, both from a Japanese and a U.S. point of view," said Geoffrey Barker, chief economist at Dresdner Kleinwort Benson Asia. Greenspan is widely credited with sparking Asia's stocks rally when he started to cut U.S. interest rates in late September. Increasingly, however, analysts are warning that these easy liquidity conditions are unsustainable because of the U.S. dollar, which has plunged 30 percent to about 111 Japanese yen from an August high of 147, shortly before the first of three U.S. rate cuts. (And even lower today. - ty) Prompted by fears of a currency devaluation in Brazil and contagion throughout the Americas, the Fed rate cuts forced the unwinding of long dollar positions and allowed the yen to rally. That in turn helped Asian currencies stabilize, and Asian interest rates to fall. And that sparked a jump in Asian stocks that defies conventional logic, given that most Asian economies remain effectively paralyzed by massive debt and rotten banks. "This (a weak U.S. dollar) has helped Asia, but I question whether it's in the U.S. or Japanese interest," said Barker. A strong yen, also fueled by the introduction of the euro, the European currency, would reinforce Japanese deflation and was "a disaster" on a one-year view for the world's second largest economy, which desperately needed export strength, he said. For the United States, the weak dollar has already lifted Treasury yields, which will boost financing costs for the current account deficit that is expected to rise to at least 2.8 percent of gross domestic product in 1998, or about 235 billion dollars. Even more worrying, those rising U.S. bond yields could soon threaten the high U.S. stock market valuations now so crucial to the continued health of the consumer-driven U.S. economy. "This is not sustainable," said Barker. "It's hopeless trying to guess when (a policy shift) will happen, but eventually they will have to stop easing to stop the dollar going into freefall." And that could spell an end to Asia's booming markets, some of which have soared more than 100 percent in U.S. dollar terms since the first U.S. rate cut in late September last year. Greenspan's liquidity boost reduced the cost of capital drastically in a region desperate for fresh funds, offering an ideal opportunity for Asia to recapitalize and restructure. But analysts said this hadn't happened. "A sense of complacency has set in with policy makers and at the corporate level," said Abhijit Chakraborrti, strategist at HSBC Securities. "The danger is, people will postpone reform." It may now be too late to exploit the benign global backdrop so carefully cultivated by Greenspan. In addition to concern about the direction of the U.S. dollar, there was a clear deterioration in the global outlook last week, given Brazil's worsening economic outlook. With Greenspan due to arrive in Beijing on Tuesday, China highlighted its own problems last week, warning that the domestic economy was weak and export growth could turn negative this year. Barker said there was a number of emerging market accidents waiting to happen as Greenspan travels through China, which has so far resisted exporter pressure to devalue the yuan. While improved global liquidity has papered over some of the cracks, the global economy remained fault-ridden, he said.