SINGAPORE: Treasury Secretary Steven Mnuchin’s view that “a weaker dollar is good” may not be shared by central bankers in Asia, though it does give room to keep borrowing costs lower for longer.
Mnuchin’s remarks — made amid the annual World Economic Forum gathering of political and business leaders in Davos — helped further weaken a three-year-low greenback while sending commodities, the yuan and the yen on a surge.
The break with American tradition on a bipartisan strong-dollar policy follows a provocative U.S. move this week to slap tariffs on imported washing machines and solar panels.
Here’s a look at what the U.S. dollar weakness — if sustained — means for the region’s major central banks.
China – Expectations Broken
A weaker dollar keeps the pressure off capital outflows, giving more room to further strangle financial excesses and loosen some capital controls.
“One good thing for China is the expectation of one-way weakening has been broken,” said Tommy Xie, an economist at Oversea-Chinese Banking Corp. in Singapore.
“So capital controls can be gradually loosened.”
Still, currency reform will only be a “secondary” item on this year’s reform agenda, as risk prevention will remain the No. 1 priority, he said.
Japan – Another Hurdle
Yen strength means cheaper imports, adding to the already momentous challenge in reaching the still-distant 2% inflation goal and reinforcing the view that stimulus will keep pumping into the world’s No. 3 economy.
Bank of Japan officials will be hampered in adjusting interest rates out of fear that the yen will make further gains, Yasunari Ueno, chief market economist at Mizuho Securities, wrote in a research note Thursday.
“It would not be a surprise that Mnuchin’s comments offer an open goal for MoF officials in Japan to make their feelings on recent JPY strength known,” according to a research note Thursday from economists at United Overseas Bank Ltd. in Singapore.
The currency fluctuations also threaten to interrupt an already fragile campaign by Prime Minister Shinzo Abe to get companies to institute pay increases of 3% as annual wage negotiations get underway.
Southeast Asia – Pressure Off
In Southeast Asia, currency strength allows central bankers to be patient on interest-rate hikes. Bank Negara Malaysia — otherwise widely expected to kick off the year’s rate increases in a decision Thursday afternoon — has felt less pressure to tighten as the ringgit’s best-in-the-region performance has made inflation less of a threat.
On the other hand, export-reliant economies such as Malaysia and especially Thailand will feel the pain in a struggle to boost shipments amid stronger currencies. The Bank of Thailand, flush with reserves, has been struggling to damp the baht’s rise.
India – Breathing Space
A weaker dollar should offer the rupee some respite after hitting a three-week low on Jan 17 on the back of a trade deficit that widened to its highest in three years.
Still, the Reserve Bank of India is unlikely to tolerate a sharp appreciation in the rupee, given it could choke off a nascent recovery in exports with overall growth yet to take off.
“For the RBI, the fight gets a bit tougher,” said Radhika Rao, Singapore-based India economist at DBS Holdings.
“We don’t think it will intervene aggressively if all Asian currencies are rising at the same time. Having said that, foreign debt inflows could just increase.”
Australia – Waiting Game
Likewise in Australia, the central bank can keep up a lower-for-longer stance as a stronger currency adds to downward pressure on inflation. With a long awaited easing in east coast property prices also unfolding, a stronger Aussie means Reserve Bank of Australia Governor Philip Lowe can continue his waiting game with unchanged benchmark interest rates.
Paul Bloxham, HSBC Holdings Plc’s chief economist for Australia, has said that a 5% increase in the Aussie trade-weighted index is equivalent to a quarter-point hike in the RBA’s cash rate. The gauge has climbed almost 4% since Dec. 8. – Bloomberg