Saturday, July 5, 2003
EU pressures Asia to allow its currencies to rise
Reuters Bali (Indonesia), July 5
European finance ministers pressured Asian governments on Saturday to allow the region's tightly managed currencies to rise against the dollar, a move that may limit any damage to Europe's economy from further euro strength. Some Asian governments have sought to limit the impact of the falling US dollar on their currencies by intervening in foreign exchange markets to maintain their export competitiveness at a time of weak global demand. With Asia striving to keep dollar weakness at bay, much of the pressure on the dollar, caused by the huge US trade deficit, has so far come via a strengthening euro.
"There has been a discussion about that," said Karin Rudebeck, State Secretary of International Affairs in Sweden's finance ministry, referring to Asian currency policy.
Rudebeck spoke to Reuters after a closed door session at an annual meeting of European and Asian finance ministers (ASEM) on the Indonesian resort island of Bali.
"The burden towards the euro has been too high in the restructuring of exchange rates globally. This has been discussed but I think there is no clear conclusion," she said.
Kim Jin-Pyo, South Korea's minister of finance and economy, told Reuters: "The European countries seem to be of the view that since the US has a huge trade deficit and many countries in East Asia and in particular China has a large share of that, there should be or there could be a cautious correction of that imbalance."
GAPING DEFICIT
The issue of Asian currency policy has become an issue because of the massive US current account deficit, which is close to five per cent of gross domestic product. To finance this, the US must attract more than $1 billion a day.
This was easy during the 1990s when a soaring stock market and high-tech boom lured foreign investors. But a stock market tumble and economic stagnation has dulled returns, slowing the inflow of investment and pushing the dollar down.
But its fall against global currencies has been uneven.
In 2003 it has fallen 9.3 per cent against the euro but just 0.6 per cent against the yen, 1.1 per cent against the Taiwan dollar and 0.5 per cent against the Korean won.
Three other Asian currencies, the Chinese yuan, the Hong Kong dollar and the Malaysian ringgit are pegged to the dollar at fixed rates.
Last week, the Bank for International Settlements criticised unnamed Asian countries for opposing a rise in their currencies that would cut their current account surpluses and, by extension, help shrink the US deficit. Speculation has swirled in financial markets that China will relax its yuan policy to allow it to rise against the dollar. Such a move may help ease inflationary pressure building up in China due to strong money supply growth.
US Treasury Secretary John Snow and a top South Korean foreign exchange official have stirred that speculation by saying that a yuan policy change may already be under consideration.
Japanese Finance Minister Masajuro Shiokawa said on Friday he would not press the issue of a yuan revaluation during three-way talks with his counterparts from South Korea and China on the sidelines of the meeting. Kim said one European delegate had mentioned the need for an appreciation of the yuan during Saturday's meetings.
"But other than that there was no mention about the valuation of the Chinese currency, and Korea does not have a specific suggestion on that either," he said.
Beijing has denied that it might allow the yuan to rise.
China's tightly controlled yuan has been seen as a big reason why Korea and some other Asian countries have not let their currencies float free and rise against the dollar.
Economists say a rise in currencies in Asia -- the source of more than one-third of America's total trade -- would cut the US current account deficit.
Because the US trade deficit with China was $103 billion in 2002 versus the US' $82 billion deficit with the European Union, analysts think a stronger yuan may do more to curb the US deficit than the dollar's fall against the euro.
The weekend Bali gathering of officials from the European Union, China, Japan and other Asian nations is also expected to stress closer coordination in macro-economic policy between their regions, home to about a third of the world's population.
"European countries are entering into an integrated single market, while we have just started to strengthen our bond market. There will be talks on how to synergise these efforts," said Indonesia's chief economics minister, Dorodjatun Kuntjoro-Jakti.
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