The Telegraph
Since 1st March, 1999
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Pressure on Asia to allow currency rise

Bali, July 5 (Reuters): European finance ministers pressured Asian governments on Saturday to allow the region’s tightly managed currencies to rise against the dollar, a move that may limit any damage to Europe’s economy from further euro strength.

Some Asian governments have sought to limit the impact of the falling US dollar on their currencies by intervening in foreign exchange markets to maintain their export competitiveness at a time of weak global demand.

With Asia striving to keep dollar weakness at bay, much of the pressure on the dollar, caused by the huge US trade deficit, has so far come via a strengthening euro.

“There has been a discussion about that,” said Karin Rudebeck, state secretary of international affairs in Sweden’s finance ministry, referring to Asian currency policy.

Rudebeck spoke to Reuters after a closed door session at an annual meeting of European and Asian finance ministers (Asem) on the Indonesian resort island of Bali.

“The burden toward the euro has been too high in the restructuring of exchange rates globally. This has been discussed but I think there is no clear conclusion,” she said.

Kim Jin-Pyo, South Korea’s minister of finance and economy, said: “The European countries seem to be of the view that since the US has a huge trade deficit and many countries in East Asia and in particular China has a large share of that, there should be or there could be a cautious correction of that imbalance.”

Gaping deficit

The issue of Asian currency policy has become an issue because of the massive US current account deficit, which is close to five per cent of gross domestic product. To finance this, the US must attract more than $1 billion a day.

This was easy during the 1990s when a soaring stock market and high-tech boom lured foreign investors. But a stock market tumble and economic stagnation has dulled returns, slowing the inflow of investment and pushing the dollar down.

But its fall against global currencies has been uneven.

In 2003, it has fallen 9.3 percent against the euro, but just 0.6 per cent against the yen, 1.1 per cent against the Taiwan dollar and 0.5 per cent against the Korean won. Three other Asian currencies, the Chinese yuan, the Hong Kong dollar and the Malaysian ringgit are pegged to the dollar at fixed rates.

Last week the Bank for International Settlements criticised unnamed Asian countries for opposing a rise in their currencies that would cut their current account surpluses and, by extension, help shrink the US deficit.

Speculation has swirled in financial markets that China will relax its yuan policy to allow it to rise against the dollar. Such a move may help ease inflationary pressure building up in China due to strong money supply growth. US treasury secretary John Snow and a South Korean foreign exchange official have stirred that speculation by saying that a yuan policy change may already be under consideration.

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