The dollar effect
By VG Cabuag TODAY Reporter | January 21, 2005 http://www.abs-cbnnews.com/NewsStory.aspx?section==Focus&oid=g048 As the US dollar weakened against most Asian currencies over the past few months, many countries have started to dump their dollar- denominated investments in favor of other much-stronger currencies like the euro in order to reduce their risk and rake in more profits. On face value, many are likely to conclude that the dollar's fall would hurt the US economy, the world's largest; however, based on recent pronouncements of several US officials and global analysts, this is not necessarily the case. For Stephen Roach, managing director and chief economist of leading global financial services firm Morgan Stanley & Co. Inc., the dollar should even depreciate further against a basket of other currencies, which will benefit the United States and the world economy in the long run. Roach, widely recognized as one of Wall Street's most influential economists, said what is happening with the US is part of what he calls a "global rebalancing," which seeks to close the yawning gap between the US and the world economy in order to sustain its current growth. "Global rebalancing in a simple sense entails the narrowing of the unprecedented disparities that had opened up between the world current account deficits, mainly the United States, and the world current surpluses mainly in Asia, but to a lesser extent as well as in Europe," Roach said in his weekly commentary uploaded on the Morgan Stanley website. He said global rebalancing also entails a shift in the mix of global savings, which should push for an increase in the US national savings rate from its record lows in the last three years and, at the same time, prod Asian and European countries to cut their excessive savings rate. LOPSIDED ECONOMY According to figures culled by the International Monetary Fund (IMF), the gross national savings of the United States as a percentage of its gross national product was at slightly more than 15 percent compared with the 20-plus-percent savings of some of the other advanced countries which before had been relying on the US. The IMF data showed that the world has a lopsided economy favoring the United States. For example, between 1990 and 1995, the Americans accounted for close to 30 percent of the world's GDP growth and the total global GDP output. Its share in the world GDP growth shot up to more than 90 percent between 1995 and 2002, before tapering off in 2003 to about 20 percent but only after US officials announced the need to slowdown the American economy. "Global rebalancing ultimately boils down to nothing short of a major shift...away from excess consumption in the United States and back toward a greater support from domestic demand in the rest of the world," Roach said. In simple terms, other nations around the world, especially export- oriented countries like Japan, China, South Korea and, to some extent, smaller ones like the Philippines, should contribute to the global economy by consuming more rather than dumping its produce or producing more for exports, primarily to the US, which gobble up a big chunk of the world's output. For instance, the US accounts for less than 5 percent of the global population but uses a quarter of the world's fossil fuel and burning up close to 25 percent of the world's coal, 26 percent of oil, and 27 percent of the natural gas. In 2003 data showed Americans had more private cars than licensed drivers, and gas-guzzling sport- utility vehicles were among the best-selling. TRADE IMPLICATIONS Roach's global rebalancing theory, however, entails three major issues that would also affect the way other countries trade with each other. These are: the further downward pressure on the dollar; jacking up of long-term interest rates; and "valuation pressures" on the US and other global equity markets stemming from rising interest rates. Through the last three years, the dollar has weakened by 16 percent against other world currencies�with the exception of the peso, which last week finally joined in the rally that other Asian economies have been enjoying since the past few years. "And my guess is the dollar's journey is about halfway completed and I look to another 10- percent to 15-percent drop in the dollar over the next few years," Roach said. Much of this gain has been cornered by the euro. This had prompted European Central Bank chief economist Otmar Issing to prod Asian governments last week to let go of their currencies and allow them to rise to ease the pressure on the euro. During the past three years, the euro gained 53 percent against the US dollar compared with the Korean won's 27 percent, Singaporean dollar's 13 percent and the New Taiwanese dollar's 10 percent. Many export-oriented governments in the region whose currencies are floated against the US dollar such as Japan, Singapore and South Korea have been doing all means to keep their currencies from further appreciating since this will eventually hurt their exports, which have been the main driver of their economies. A stronger currency would cut the earnings of the export-oriented companies, usually firms like Japanese giant Sony Electronics and Korean Samsung Electronics Co., as this would make their products uncompetitive overseas. On the other hand, China, the world's sixth-largest economy, has voiced out its hard stance against floating the yuan, which has been pegged at 8.3 to the dollar since 1996. Analysts said if Asian countries insist on intervening on their currencies, the Unites States will have the hard time to balance its trade deficit. In November the US Commerce Department announced an all-time-high $60.3-billion trade gap, an increase of 7.7 percent over the $56 billion it posted in October, as demand for oil and other consumer goods continue to expand. Even US Treasury Secretary John Snow said other countries in Asia need to expand their economies to help narrow that gap by increasing demand for American goods. US authorities have unveiled several measures to help fine-tune the US economy, including increasing interest rates five times in 2004 to 2.25 percent. TWO ENDINGS Roach, however, warned that global rebalancing could either have a benign or disruptive outcome. A benign effect, he explained, would have an "orderly rebalancing" of the global economy, while a disruptive effect would push the US and other key countries in the global economy into recession. "And yet as I look at these two options, there are three factors that continue to encourage me that the odds favor the benign outcome at this point as a best case alternative for the world economy for the global financial market in 2005," he said. These factors, in order of importance, are the weakening dollar, the softening oil prices in the international market and China's policy maneuvers for a "soft landing" as it avoids economic overheating. Roach said the dollar has been weakening against other currencies at an average of 5 percent a year since 2002 and if it stayed on that path in the coming years, it would not qualify as disruptive. Meanwhile, oil prices have softened slightly compared with the fourth quarter last year when it reached $55 a barrel. Lower crude prices would help emerging markets expand their economies. Chinese authorities have been pushing hard to cool off its economy. Its GDP is expected to hit 9 percent in 2004, with foreign trade volume expected to exceed $1.1 trillion and foreign direct investment at more than $60 billion. "The key risk to all of this, of course, is that the imbalances that exist globally are now so large that the scales could shift quickly away from the benign to a more disruptive outcome depending upon the nature of the eventual risk that plays out in the global economy," Roach warned. "My guess is we have to live with this risk for quite some time but I do draw encouragement at this point from the fact that the odds [are with us] because the [movement of the] dollar, oil and China looks somewhat more constructive than I have feared as recently as last summer or the early months of this fall," he said. With the United States still controlling the tempo of the world economy, it has become increasingly important that investors and policymakers around the globe shift its focus of the world from an integrated perspective, he advised ------------------------ Yahoo! Groups Sponsor --------------------~--> In low income neighborhoods, 84% do not own computers. At Network for Good, help bridge the Digital Divide! http://us.click.yahoo.com/EA3HyD/3MnJAA/79vVAA/NJYolB/TM --------------------------------------------------------------------~-> �������������������������������������������������������� This is ZESTEconomics. Post economics-related articles and event info to [email protected] If you got this mail as a forward, subscribe to ZESTEconomics by sending a blank mail to [EMAIL PROTECTED] OR, if you have a Yahoo! ID, visit http://groups.yahoo.com/group/ZESTEconomics/join ==theZESTcommunity====================================== [1] ZESTCurrent: http://groups.yahoo.com/group/ZESTCurrent/ [2] ZESTEconomics: http://groups.yahoo.com/group/ZESTEconomics/ [3] ZESTGlobal: http://groups.yahoo.com/group/ZESTGlobal/ [4] ZESTMedia: http://groups.yahoo.com/group/ZESTMedia/ [5] ZESTPoets: http://groups.yahoo.com/group/ZESTPoets/ [6] ZESTCaste: http://groups.yahoo.com/group/ZESTCaste/ [7] ZESTAlternative: http://groups.yahoo.com/group/ZESTAlternative/ [8] TalkZEST: http://groups.yahoo.com/group/TalkZEST/ Yahoo! Groups Links <*> To visit your group on the web, go to: http://groups.yahoo.com/group/ZESTEconomics/ <*> To unsubscribe from this group, send an email to: [EMAIL PROTECTED] <*> Your use of Yahoo! Groups is subject to: http://docs.yahoo.com/info/terms/
