Word: dollarized
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...continuation of this trend could pose a serious problem for Asia. The region needs super-competitive currencies in order to keep its export-led growth model humming. To the extent the surprisingly robust dollar drags Asian currencies along for the ride, Asia's exports will become more expensive. Without support from internal consumption, further dollar strengthening could turn the region's export boom into a bust, a devastating development for growth...
...trouble could be brewing for China. While Beijing technically changed its foreign-exchange mechanism on July 21, it has been reluctant to cut the renminbi (a.k.a. the yuan) loose. After an initial 2% adjustment against the dollar, the yuan has traded within a very tight range over the subsequent four months. As the dollar has gone up, so has the Chinese currency. So far this year, the yuan has appreciated nearly 20% against both the euro and the Japanese yen. Consequently, while the U.S. continues to urge Beijing to allow its currency to strengthen versus the dollar, the yuan...
...Fortunately, for most of Asia, there is good reason to believe that currency headwinds might abate. That's because the dollar may be about to resume its multi-year slide. America is suffering from its largest current-account deficit in history?currently running at 6.4% of U.S. GDP and probably headed into the 7.5% range by the end of 2006. History and economic theory point to a resumption of dollar weakening if the U.S. is ever to turn the corner on its current-account problem...
...orderly dollar decline would make Asia's exports cheaper in global markets, but there's an important caveat. Recently, Asia has been drawing support from the long-awaited recovery of the Japanese economy, the world's second-largest. If Japan's newfound vigor is real, there is no overriding reason why the yen should continue to sag. Just as the day will come when the dollar will fall again, a concomitant rebound in the yen is equally likely. That could prove quite vexing to Japanese exporters...
...Even if Asia avoids the pitfalls of a further strengthening of the dollar, it still faces two big risks: a long overdue belt-tightening by the American consumer, the region's biggest customer, and protectionism. Either outcome would spell tough times ahead for China and a China-centric Asian economy...