The US government is playing chicken with East asian countries mercantalistic policies. Eventually they will capitulate - the question is how much pain are they willing to bear?
From the economist:
By the end of last year, Asian central banks held $1.89 trillion of foreign reserves, the vast bulk of them in dollars. If these reserves lost value, Asian economies would suffer an almighty capital loss in domestic-currency terms. A recent study by the New York Federal Reserve counted the costs. If the Chinese yuan were to appreciate by 10% against the dollar (and other reserve currencies), China would suffer a capital loss worth almost 3% of GDP, the study found. If the won rose by 10%, South Korea would suffer similarly. The toll would be even greater in Singapore (10% of GDP) and Taiwan (8%).
To avert such an appreciation, Asian central banks would have to amass ever greater holdings of dollars. But this would only expose them to greater capital losses down the road. Alternatively, they might seek to avoid the consequences of a dollar fall, by diversifying into other reserve currencies, such as the euro. But that would only bring the dollar crashing down all the more quickly. In other words, Asian central banks are caught in an awkward dilemma: either they try to break the dollar’s fall, or they try to escape from underneath its collapse.
Will the US currency collapse bring a recession? I have a feeling that it will collapse as soon as one or two of the countries move to stem their potential losses.
http://www.economist.com/agenda/PrinterFriendly.cfm?Story_ID=3372405
Posted by Anthony at November 9, 2004 11:07 AM | TrackBack