Asia defends currencies even as stocks fluctuate wildly
Large foreign-currency reserves and overhauled regulatory systems have helped stability. Investors also seem to be better targeting which currencies are at risk.
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Cutting rates makes sense, as it lowers the cost of borrowing for Korean companies and boosts their struggling stocks, says Bill Belchere, a regional economist for Macquarie Bank in Hong Kong. He is sanguine about the vulnerability of the won and other Asian currencies, given their ample reserves. More important is to put the brakes on the sell-off of stocks. "In equity markets, people do have liquidity [money], but not the confidence to invest it," he says.Skip to next paragraph
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Ultimately, restoring that confidence is a task that goes beyond what any Asian policymaker can do. What began as panic driven by exposure to US mortgage-backed loans has affected most aspects of the global economy.
"[Asian] governments are in good shape, the companies are in good shape, and individuals are in good shape, by and large. It's not a crisis that's been born in this region," says Hugh Young, managing director of Aberdeen Asset Management in Singapore. His firm manages around $35 billion in Asian investments, down from $50 billion at the start of the year.
As some currencies wobble, the Japanese yen has hit highs against the dollar not seen since the 1990s. In an unusual step, the G-7 grouping of rich countries signaled Monday that it supported intervention by the Bank of Japan to cap the yen's rapid rise.
As with the dollar, the yen's rise is underpinned by a repatriation of capital to Japan, including money borrowed when Japan's interest rates were much lower than those of other markets. That spurred a flurry of speculative offshore bets that have become less attractive as the US and other central banks pare rates to aid their wilting economies.
In the 1997-98 crisis, the IMF forced central banks in Thailand, Indonesia, and South Korea to raise rates to defend their beleaguered currencies, a move critics said was ineffective and led to many indebted companies going bankrupt. Since then, Asian countries have accumulated trillions of dollars in reserves as a hedge against another currency crisis.
Last weekend, Asian leaders at a Beijing summit discussed a longstanding proposal to pool some reserves into a regional rescue fund, with Japan, China, and South Korea supplying the bulk of the initial $80 billion. This would provide short-term liquidity for participating countries, such as those facing a run on their currency, but not a US-style banking bailout, says Chalongphob Sussangkarn, who stepped down in January as Thailand's finance minister.
The fund has been touted as an Asian alternative to the US-dominated IMF, and the current crisis should be a catalyst to its formation, says Mr. Chalongphob, director of the Thailand Development Research Institute in Bangkok. "We have huge reserves in this region," he says. "It would be ridiculous if a country in the region went under because it didn't have enough liquidity."