Business Times (Singapore)
Copyright 2006 Singapore Press Holdings Ltd
March 29, 2006
Collective regional effort will prevent currency crises: ADB Joint appreciation would reduce dependence on dollar's stability
ASIAN countries should not take the continued stability of the US dollar for granted and should act now to avert a possible new regional currency crisis by jointly appreciating their currencies, a senior Asian Development Bank (ADB) official warned here yesterday.
By sharing the burden of adjustment, they could reduce the danger of a sudden plunge in the value of the dollar, Masahiro Kawai, head of ADB's regional integration office, said.
Also speaking here, former US government official Clyde Prestowitz echoed Mr Kawai's warnings about the unsustainability of an overvalued dollar supported by huge Asian holdings of the US currency.
They spoke as China reported that it had overtaken Japan to become the world's biggest holder of foreign exchange reserves, following a US$8.5 billion surge in their value to US$853.7 billion in February.
Mr Prestowitz, who heads the Washington-based Economic Strategy Institute, urged Japanese Prime Minister Junichiro Koizumi to use the occasion of the upcoming Group of Eight (G-8) leaders' meeting in St Petersburg to push for a 'new Plaza Accord' as a means to head off a major currency crisis. Asian central banks are becoming 'increasingly nervous' about their huge holdings of dollars, and are 'walking on eggshells', he suggested.
Any shock in the international economy could quickly alter investors' perceptions about the safety and stability of the dollar, Mr Kawai said during a briefing.
'Our suggestion to Asian countries is not to take the continued financing of US deficits as a given. It is better for Asian countries to collectively appreciate their currencies to reduce the burden.'
ADB is currently working to compile an index of Asian currencies - known as the Asian Currency Unit or ACU - to measure the collective movement of regional currencies against the dollar and other global currencies, Mr Kawai noted. This could provide a useful benchmark for joint regional action in appreciating Asian currencies against the dollar if such concerted action is agreed upon, he added.
The index could also serve as a basis for the issuance of multi-currency bonds in Asia, enabling global investors to invest in Asian currencies or in financial futures based on Asian currencies, he said.
The composition of the ACU has yet to be finalised but is likely to be based upon the Asean+3 currencies, he added.
Some financial market players have urged inclusion of currencies such as the Hong Kong dollar and Taiwan dollar in an Asian currency index or indices, but this has not yet been decided.
Mr Kawai also disclosed that ADB will reveal a new medium-term policy strategy during its annual meeting in Hyderabad, India, in May.
This will reflect ADB's new priorities under its president Haruhiko Kuroda, who took over at the beginning of 2005, and will be based on 'four pillars' of regional integration initiatives, he said.
These cover the need for cross-border transport and other infrastructure facilities; the need to promote trade and investment cooperation through free trade agreements, including an East Asia-wide FTA; monetary and financial cooperation, including the development of regional bond markets and other initiatives; and regional cooperation in 'public goods' such as combating health hazards, environmental problems and natural disasters, he said.