Asian economies can only gain from a rebalancing of global currency values This week's dramatic strengthening of the Hong Kong dollar caught investors unawares, prompting a surge in stock prices, but the flip side of the currency equation could have a more enduring impact. Enter the US dollar and its sharp fall in value against the Japanese yen and the euro in the past few days. A smooth adjustment to a weaker dollar should, say economists, underpin an economic recovery in the United States and in turn drive growth in Asia's export-dependent economies. Rather than fret about lost export competitiveness due to stronger exchange rates Asian economies will benefit from a positive rebalancing of global currency values, providing the basis for sustainable recovery, argues Michael Spencer, chief economist with Deutsche Bank. A weaker dollar will stimulate US exports which in a low interest environment will stir borrowing to fund capital goods purchases necessary to crank up production. US firms may have over-invested in capital stock in the 1990s but they remain dependant on Asian suppliers for basic components that will compensate for reduced exports of consumer goods. Hong Kong's fixed link to the US dollar will render the economy more competitive in trade, finance and producer services, underpinning a slow improvement in domestic demand, economists say. The strengthening of the Hong Kong dollar beyond the $7.80 peg to the greenback does not threaten Hong Kong's capital market stability, said Markus Rosgen, a strategist with ING Financial Markets. 'And if the yuan is revalued, which we think it will be, then this will further enhance Hong Kong's competitiveness,' he said, forecasting a 5 per cent to 10 per cent revaluation in the next six months. The shift to a more positive Hong Kong growth outlook has built gradually since the Sars crisis, underpinned by China's decision to allow solo travel to Hong Kong by mainland tourists and a pickup in home sales leading to a mild upturn in property prices. Last weekend's call by the Group of Seven industrialised nations for more flexible exchange rates upped the stakes for an appreciation of the yuan prompting a flood of funds into Hong Kong. Such movement was partly the result of 'shorts' exiting speculative positions against the Hong Kong dollar. But a rise in buying of real assets by foreign and local funds hoping for a burst of inflation also explains the price increases. 'Local investors here have been repatriating money they had invested overseas given the growing confidence in the economy and should you see a return to positive inflation in Hong Kong that is a huge positive for the property sector,' said Stephen Corry, regional strategist with Merrill Lynch. He noted that many Hong Kong residents hold large savings balances in foreign currency accounts and are heavily invested in overseas stock and property markets. 'Hong Kong is the biggest winner from the G7 outcome in terms of increased competitiveness, in terms of money supply and the increased potential for reflation. They are all positive for property buying and consumer goods,' Mr Corry said. A shift to an inflationary bias together with falling short-term interest rates to levels below comparable US rates is seen as a likely trigger to prompt deflation-weary consumers into spending rather than hoarding savings. 'Interest rates have been falling for a while, but as long as we had deflation people putting their money in the bank were still better off the following year as prices had fallen. That dynamic is changing at the moment,' Mr Rosgen said. Property, traditionally a key economic driver and store of wealth, is increasingly viewed as a positive investment option although deeply embedded negative equity and an overhang of flat inventory remains an inhibitor. What is more, potential buyers have been burned before and households are expected to remain risk shy when it comes to buying local assets. Recently, property developers have been able to raise prices by up to 5 per cent and still report strong weekend sales. Some analysts argue that the market will be able to absorb additional, quite substantial, price increases in the next 12 to 15 months. Franklin Lam of UBS is among the most bullish with a projection of a 30 per cent rise. In the Hong Kong stock market, analysts are pointing to property and banking stocks as the key beneficiaries, alongside consumption-related stocks such as media and clothes manufacturers. The average daily turnover in the Hong Kong stock market has risen to about $20 billion over the past two sessions this week compared with $7.96 billion average in the first eight months this year. 'Some of this is short-term capital inflows. Yes, they come quickly and they can leave quickly,' Mr Rosgen said. But a currency is generally appreciating because there is demand for it and demand arises because people want to do something with that currency, he added. 'Given where interest rates are I don't think foreigners are buying the Hong Kong dollar just to get a lower interest rate than they would get in the domestic market. You have to buy the currency before you buy the equity and that is essentially what people are doing.'