Monday, October 22, 2012

Asian and Emerging Market Currencies Confronts the US ‘Our Currency, Your Problem’ Dilemma

Former US Treasury Secretary’s John Connally’s famous comment about the US dollar where he said was “our currency, but your problem” seems very pertinent today.

Governments of Asian and emerging economies whose currencies have been linked to the US dollar have been feeling frictions or pressures from the US Fed’s credit easing policies (as well as from the other developed economies).

From Bloomberg,
Hong Kong’s de facto central bank stepped in for the first time since 2009 to prevent the city’s currency from rising against the U.S. dollar after it touched the upper limit of a range that triggers an intervention.

The Hong Kong Monetary Authority said it bought $603 million at HK$7.75 per dollar, which is the so-called strong side of the permitted convertibility range of HK$7.75 to HK$7.85 that obligates intervention. The move, announced in an e-mailed statement yesterday, was confirmed by spokeswoman Rhonda Lam who said the HKMA acted during New York trading hours.

“Funds continue to flow into Hong Kong given the monetary easing in the U.S. and Europe,” said Kenix Lai, a currency analyst at Bank of East Asia Ltd. in Hong Kong. “That’s evident by the rising stock market and property prices. I expect HKMA will still have to intervene in the near term as capital inflows continue.”

Policy makers from around the world have bemoaned the economic threat of stronger exchange rates from the U.S. Federal Reserve’s monetary easing. At International Monetary Fund meetings in Tokyo this month, Brazil’s Finance Minister Guido Mantega vowed to shield his country from the “selfish” monetary policies of some developed nations, while Philippine central bank Governor Amando Tetangco said the Fed was causing “challenges to monetary policy in emerging markets.”
Each government have their own idiosyncratic political agenda, where the supposed lumping of threat of a “stronger exchange rate” is in truth signifies a dubious, if not devious, propositions.

The fact is that all central banks have been doing the same thing, except the difference lies on the degree or scale of inflationism and interventions. The above shows Hong Kong as no different.


The world operates in uncharted territory when it comes to government's aggressive use of monetary tools spearheaded by developed economies (chart from Zero Hedge)

Yet for some governments, the apparent passing the blame on others serve as convenient smokescreens to impose domestic social controls and to implement policies which benefits the incumbent political leaders.

As I pointed out in the past 
In a world where central banks compete to destroy their currencies through devaluation, rising currencies may signify as symptoms of relative devaluation and they could also mask the bubble policies that underpins the statistical economic growth.
Maybe emerging market or Asian central bankers would like to try a shock therapy: Link their currencies to gold and simultaneously liberalize their economies.  However, this would go against the interests of those in power or the political class, as well as, those connected to or dependent on them.

Besides, these would vastly reduce the ability for politicians to make political promises that would jeopardize their hold on power.

At the end of the day, currency wars or the dilemma of "our currency, your problem" through the threat of "stronger exchange rates" makes for great soundbites.

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