Despite dollar doldrums, Asian central bankers have little choice

IT HAS BEEN a turbulent week in Asia's foreign exchange markets. Rumours, hastily denied, that Asian central banks were planning to sell US dollars sent the American currency into a tail-spin on Tuesday.

Then, news leaked out of a closed-door meeting in Bangkok of something called the Asian Bellagio Group, a secretive gathering of regional finance ministry officials and central bankers.

For many foreign exchange dealers, this seemed to confirm their worst fears: a sinister conspiracy among Asian governments to manipulate the world's currency markets. Rumours swirled: some claiming Asia's central banks were collaborating to support the US dollar, others that they had agreed to let the greenback slide.

As usual, almost all the talk was baloney. There is no sinister conspiracy and no wholesale desertion of the US dollar. For the time being regional central banks will go on resisting the appreciation of their own currencies. They will continue to accumulate foreign reserves - adding to the US$3.8 trillion worth they already have - and they will continue to hold almost all that money in US currency.

It is true that the Bank of Korea said it had plans to diversify its US$200 billion of reserves, and it is also true that the Asian Bellagio Group met in Bangkok, but neither of these events means much. However, it says a lot about the jittery state of financial markets that a few lines in the annual parliamentary report of the Bank of Korea and an obscure economics discussion group can trigger a rout in the currency of the world's richest economy.

The cause of the jitters is the huge pot of foreign exchange reserves that Asia's central banks have accumulated since the regional crisis of the late 1990s. In the face of weak demand at home, regional governments have sought to generate jobs by encouraging exports. To keep their exporters competitive, central banks have bought the dollars their exports earn, selling their own currencies in return. Until now, the policy has worked a treat.

Increasingly, however, the central banks are facing the problem of what to do with all that stockpiled money. Traditionally, central banks have parked their reserves in the safest of all havens, US Treasury bonds. In the past few years, massive buying of US government debt by Asian central banks has been instrumental in funding the budget deficit run up by Washington.