Friday, January 15, 2010

>At what point in time will Asia lose interest in the dollar? (NATIXIS)

Asian countries (China, Japan, South Korea, Asian emerging countries) are currently forced to shore up the dollar's exchange rate and to prevent an excessively sharp appreciation of their currencies, mainly for two reasons:

− the dollar's role as a currency of global trade, particularly in Asia;

− the weight of the United States in Asian countries’ exports and output, once we take into account the segmentation of the production process between Asian countries, which increases intra-Asian trade, but in a way that is related to Asian final exports to the rest of the world.

Asia will not lose interest in the dollar until Asian demand accounts for a major part of Asian output. We will try to estimate the time needed for this to occur.

Once Asia’s economic independence has become sufficient enough, the financial links with the United States will be broken: Asian central banks will stop shoring up the dollar, the United States will have to rebalance its foreign trade with Asia, and Asian savings will be lent (invested) in Asia instead of being lent to the United States, which will accelerate Asia’s financial development. Of course, this will also require a financial modernisation of many Asian countries. The amount of global trade denominated in dollars will probably also shrink.

To read the full report: DOLLAR