Why a weaker US dollar may be good for some Asian countries
Neal Kimberley says a slumping US dollar will hit exporters but it might work in favour of other areas in Asian economies, such as energy prices in India and tariff exemptions in South Korea
While the US Treasury couldn’t openly admit it, a weaker US dollar versus Asian currencies would surely go some way towards resolving a number of the issues raised in its latest report on the foreign exchange policies of the major trading partners of the United States, published last Friday.
It might also be that, for now, a weaker greenback wouldn’t be that unpalatable to some nations in Asia. The currency channel might be a fairly painless way of addressing US concerns without impeding national economic objectives in Asia.
As it stands, under the US Trade Facilitation and Trade Enforcement Act of 2015, the US Treasury currently applies three criteria to the economies of the country’s 12 largest trading partners and additionally to Switzerland. If any meet all three criteria, then the act “establishes a process to engage economies that may be pursuing unfair practices, and impose penalties on economies that fail to adopt appropriate policies”.
The first of the three criteria specified in the act is that the nation in question runs a bilateral trade surplus with the US that is in excess of US$20 billion. The second is that it has a current account surplus that is at least 3 per cent of gross domestic product.
As for the third, it focuses on whether a nation has conducted persistent, one-sided intervention in the currency market. That is defined as being when net purchases of foreign currency are conducted repeatedly and total at least 2 per cent of an economy’s GDP over a 12-month period.
Six of those under scrutiny have fallen foul of one or two of these criteria but none breached all three. The six are Germany and Switzerland in Europe with the other four all from Asia, namely China, Japan, South Korea and, as a new entrant in this report, India.
Concentrating on Asia, it’s notable that while China’s US$375 billion goods trade surplus with the US dramatically breaches the first of the three criteria, China doesn’t trigger the other two.
Japan and South Korea exceed the trade surplus and current account surplus criteria while India joins the monitoring list for breaching the trade surplus and the currency intervention limits.
At any rate, it’s clear that the US Treasury sees exchange rates as part of the problem.
“Despite some recent appreciation, China’s real effective exchange rate remains over 6 per cent below its peak level in mid-2015,” the Treasury report says, while “on a real effective basis ... the [Japanese] yen depreciated by 2.4 per cent from the start of 2017 through February of this year.”
As for Seoul, the report added that the International Monetary Fund “has considered the Korean won to be undervalued every year since 2010, and in its most recent evaluation considered the won to be undervalued by 1-12 per cent.”
Always conscious that a stronger local currency erodes exporter competitiveness, nations in Asia would normally be reluctant to use the currency channel to assuage US concerns, but on this occasion it might suit some in Asia to play along a little.
As a major energy importer, India might benefit from a stronger rupee as a way of reducing the domestic inflationary impact of a higher US dollar-denominated oil price.
From China’s perspective, a degree of yuan appreciation might help placate Washington but would anyway be a likely natural consequence of the kind of market opening initiatives alluded to by President Xi Jinping at the Boao Forum last week as part of the country’s longer-term “Made in China 2025” agenda.
Beijing will additionally have noticed that last month’s revisions to the 2012 trade pact between South Korea and the US also made reference to a side deal incorporating a Korean commitment to avoid weakening the won in pursuit of competitive advantage.
That might also limit how far Korea’s policymakers can now deploy foreign exchange intervention to head off a rising won.
Meanwhile, in Tokyo, ahead of Prime Minister Shinzo Abe’s visit to the US this week, Japanese officials will already have noted how the Treasury report referenced Japan’s “still-large US$69 billion” goods trade surplus with the US.
Tokyo might not like the idea of yen strength but it might just have to put up with it.
A weaker US dollar against Asia would suit the US administration. It might also, even if grudgingly, currently be acceptable to some policymakers in Asia. Taken together, that could make for a persuasive case for a new spate of US dollar weakness versus Asia.
Neal Kimberley is a commentator on macroeconomics and financial markets