Foreign Exchange Market

Asia's cash hoarders show crisis mindset

PUBLISHED : Wednesday, 29 October, 2003, 12:00am
UPDATED : Wednesday, 29 October, 2003, 12:00am

SEVEN YEARS OF lean and seven years of fat, says a line from the Good Book. Seven years ago Asian central banks were just beginning to fight a speculative onset against their currencies, which had generally been rigged at artificially strong levels.

That attempt inevitably failed, of course, and the result was the Asian financial crisis of 1997-98. Now they are doing it the other way round. They are keeping their currencies artificially weak by attempting to track the US dollar on its steady downwards trend.

The first chart shows you the evidence. Since February 1 last year, which we shall take as the peak of US dollar strength, the Australian dollar has risen by 37.8 per cent against its US counterpart and the euro by 36.5 per cent. Then you get pound sterling, the yen and the Canadian dollar, all of them showing just under a 20 per cent gain over the period.

You may notice that I have also included gold in this list, up 37.2 per cent in US dollar terms, which means that people who think in euro and Australian dollars have seen no real gain in the value of their gold holdings at all. This may still satisfy them, however, as the problem for so many people today is where to find any refuge from a US dollar that, by all indicators, is set to tumble further. The euro is new and not entirely trusted, sterling is Europe minus the euro, Australia and Canada are still struggling to get to even the welterweight class in economic clout and Japan is hardly in the safe haven class yet.

Thus the alternative for many people is commodities and gold is not the only one to show that, while refugees from the dollar may not yet be clutching at straws, they do not see much to keep them afloat. Platinum prices have risen 65 per cent over the period, nickel 92 per cent and, in the soft commodities, soybean futures are up 79 per cent and cotton futures up 115 per cent. It has not happened because supply has suddenly collapsed or industrial demand shot up.

And while some Asian currencies do indeed fall in the straw class, others have more to buoy them up. You would ordinarily expect that with Asian exports still booming, current account surpluses running at 6 per cent of average gross domestic product, and inflation restrained, there would be general Asian currency strength, too, against the US dollar.

But look at the bar in the chart that represents the weighted average of Asian currencies other than the yen against the US dollar. It is up slightly but not by much and most of that strength was registered last year.

What has actually happened is that almost all the money from those big Asian trade surpluses of the past five years has gone right back out again in the form of rapidly rising foreign reserves.

Include Japan and the figure is now US$1.65 trillion, double what it was four years ago. Take Japan out and the others shown in the chart have just crossed the $1 trillion mark, a doubling in five years.

You could ordinarily expect this in the fallout of the 1997/98 crisis. In currency crises you tend to see domestic investment decline and the income from the current account going to pay off foreign bills incurred earlier. But Asia's currency crisis is now more than five years in the past. The bills are mostly paid. Yet domestic investment continues to be weak and the cash has instead gone out as a build-up of reserves.

The evidence suggests that we are now seeing policy measures at work in this. Still operating in a 1997 mindset, the Asian central banks want big reserves to fight off any speculative attacks and do not know when to stop.

That seven years of fat and seven of lean may be the normal economic cycle but the extent of the lean or fat is heavily determined by government policies that are put in place too late and kept long after they are needed. I do not know how and where this latest reserve madness will go wrong but wrong it will go eventually.