Shifts in the global economy mean that a number of Asian countries, traditionally fearful of increases in their currencies, are now beginning to accept that appreciation might be good news.
Having recovered from the slump at the beginning of the decade to capitalize on buoyant global growth and more fluid trade, nations are now seeking to build up their domestic economies. Rising currencies bring more spending power while at the same time providing shelter from rampant commodity costs. Moreover, because a fall in the dollar is the most likely counterpart to rising local currencies, the changes may break dependency on the US market and help form a more resilient regional economy.
“This is going to be positive for the Asian economies,” Kevan Watts, Chairman of Merrill Lynch International told Emerging Markets yesterday. “The declining dollar will help Asia stand on its own feet.”
With the dollar tipped to fall and questions over the ECB’s willingness to allow much further euro appreciation, a number of Asian currencies are already feeling the heat.
The Malaysian ringitt, viewed by some investors as a proxy for the yuan, hit an 8-year high this week, after central bank governor Zet Aziz unexpectedly raised interest rates on April 26. In previous years that would have been a signal for the government to tell the market to let off but the country’s second finance minister told Emerging Markets he’s not concerned: “It’s orderly and we don’t see a problem,” he said.
A similar message came from policy-makers from neighbouring countries. Hartadi Sarwono, deputy governor of the Indonesian central bank told Emerging Markets on Wednesday he’s “happy because the current appreciation reduces pressure on inflation.” Philippine finance secretary Margarito Teves said that a stronger peso “helps us in terms of servicing our debt. It’s also a helpful device for investors if there’s continued strength.” He only added “we can’t go into extremes.”
For the giants of Asia, the story is certainly much more complex. Chinese vice finance minister Li Yong issued a strong rebuttal of demands that the yuan be given more flexibility. The delicate balance the government is trying to create in the economy could collapse if exchange rate moves are not closely controlled, he argued.
But Asia’s economies are undoubtedly less fragile than they were in 2002 and therefore in a much better position to ride, rather than be swamped by a wave of currency appreciations.
“In 2001 or 2002 absolutely the last thing most countries wanted would be a sharp appreciation of the currency,” comments Andrew Milligan, global head of strategy at Standard Life Investments. But times have changed, according to Milligan and right now for Asia rising currency values are “actually quite good news.”