Angst as Asian central banks buy dollars

With plunging exports and economic contraction overtaking inflation and liquidity as concerns, Asian central banks are starting to buy dollars, raising devaluation worries.

Patrick Bennett, Asian currency strategist at Societe Generale, said there was evidence that central banks in Singapore, Malaysia, India and South Korea had started dollar buying "in the last couple of days".

HSBC has highlighted "a shift to depreciation policy", notably in Thailand and Taiwan, which recently bought dollars for the first time since August 2007 and April of this year respectively.

The Asian Development Bank gave warning last week that "we need to avoid unnecessary and excessive interventions in the foreign currency markets, especially to depreciate domestic currencies".

Writing in this week's FT, Michael Pettis, finance professor at Peking University, expressed caution about "a grave risk" that Asian countries would seek to force overcapacity adjustment on to trading partners through currency depreciation and other trade-related measures.

As the global financial crisis drove a flight from risk over the past six months, many Asian nations aggressively deployed reserves to slow their currencies' slide against the dollar, which had aggravated the inflationary impact of high prices for fuel and other commodities.

October saw record depletions of the reserves built up over a decade-long economic surge in South Korea, India, Singapore and Indonesia.

Mr Bennett said, "The fact that they are now coming in to provide liquidity against their currency strengthening is recognition that external demand is slowing rapidly and the best response to that is allowing some weakening in their currencies."

The shift follows an abrupt slump in Asian exports, notably for China, which endured in November its first monthly fall in seven years. The combined dollar value of exports from China, Taiwan and South Korea has fallen 22 per cent over the past three months, according to Goldman Sachs.

Intra-Asian trade is crumbling, with exports from Taiwan and Korea to China down respectively 44 per cent and 37 per cent from their summer peak.

Lee Jong-wha, head of the Asian Development Bank's office of regional economic integration, said there were worrying signs policymakers would be pushed into devaluation to support ailing exporters.

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