The Asian Currency Question

Article excerpt

An extraordinary thing is happening in economies around Asia: currencies are rising and governments are letting it happen.

It's not clear the tolerance will last--in fact, history suggests it won't. Japan alone, for example, has spent at least nine trillion ($118.7 billion) yen this year to cap the yen's rise and it may sell more. But Asia seems to be resigning itself to a tectonic shift in markets: a trend toward a falling US dollar.

Fears the great dollar slide that's been predicted for years is afoot have hit a fever pitch since the 20 September Group of Seven meeting in Dubai. While no one seems to agree on what the G-7 said, investors reckon its call for flexible exchange rates was aimed at Asians who've helped keep the dollar strong by selling currencies. It's refreshing to see governments aren't fighting the dollar's slide--at least not yet. Much good can come from firming exchange rates in Asia, which is headed for its biggest quarterly equity gains in almost five years.

To understand how currencies are helping, look no further than South Korea, where stocks are up four per cent this quarter. The won's 1.5 per cent rise against the dollar last week encouraged investors to buy Korean shares.

Help for Korea

If there's any large Asian economy that could use some foreign capital these days it's Korea. Recession, corporate scandals and concerns over the nuclear standoff with North Korea have knocked the wind out of its markets. As the won rose, and Korean officials didn't sell the currency, investors increased their equities purchases.

Asia's been pumping up economies for years by holding down currencies, selling them early and often. The export your-way-to-prosperity strategy has worked marvellously since the 1997 Asian financial crisis. Now that Asia's economies are growing and stock markets are rising, it's time to try another approach and get out of the trap of export dependence. …