In the light of the recent G7 statement on exchange rates, we would make two observations. First, if this G7 statement on exchange rates proves to be a major watershed event for the dollar, it may also prove to be a major watershed event for the symbiotic relationship between Asia and America
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I believe the Financial Times article copied below echoes this sentiment.
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Japan's dollar-buying a mixed blessing for US By Christopher Swann Published: October 2 2003 5:00 | Last Updated: October 2 2003 5:00
Japanese intervention earlier this week to curb the yen's strength against the dollar may be seen as a slap in the face for the US.
The plea in last month's G7 communiqué for greater currency flexibility - in-serted at US insistence - was widely interpreted as a jibe against fixed and managed exchange rates in Asia.
But the US may ultimately be glad that its blandishments have had so little effect on Japan.
Although policymakers in the US would welcome a weaker dollar, they will be keen to avoid a destabilising rout.
If this week's trading is anything to go by, an abrupt end to Asian purchases of dollars could well lead to such a rout.
Just a few days without Bank of Japan intervention saw the greenback fall to three-year lows against the yen and slide to within sight of record lows against the euro.
"Unless the central banks in Asia are there to provide a crutch for the dollar, market forces will knock it lower," said Paul Meggyesi, currency strategist at Deutsche Bank in London.
Figures from Japan this week revealed that the Japanese bought around $40bn (&euro35bn, £24bn) in September alone.
This means that the Japanese almost singlehandedly funded the US current account deficit - which averages around $46bn a month.
The burden of financing the current account deficit has been shifting from the private sector to the public sector, according to David Bloom, currency strategist at HSBC.
"In 2000 the deficit was being funded by individuals trying to maximise returns and believing the US to be the best investment opportunity," he said. "Now a large part of the deficit is being funded by public sector bodies in Asia, whose aim is not profit but to protect domestic exporters."
A withdrawal of these funds, he said, would lead to a sharp fall in the dollar and could push up US interest rates - as international investors cut back on purchases of US Treasuries.
As exports represent just 10 per cent of GDP, it is typically better for the US to have lower interest rates than a depreciating currency. It is almost certain the administration considered this trade-off.
Many observers and economists think the US call for greater currency flexibility at the G7 meeting was essentially a gesture aimed at countering complaints from Midwestern manufacturers about Asian competition.
Economists think that the US would have been fairly confident that its public call would be ignored by Japan and China. "Japan has seen several promising recoveries snuffed out by higher taxes or interest rates," said Mr Bloom. "They will want to make sure that this revival is not endangered by a rise in the yen."
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