REUTERS — Breakingviews

The art of the depreciation

2 February 2018 By William Pesek

Currency moves speak louder than words, Donald Trump is learning. The U.S. president’s administration has sent contradictory signals about the end of the strong dollar, a cornerstone of American policy since 1995. But the market clearly believes in a weak dollar era – which spells trouble for Asia, as the region most dependent on trade.

There are two channels to watch. One is lower trade volumes as Asia’s exports become less competitive. Another: shrinking profits as companies convert dollar earnings into local money.

Dollar weakness in 2017 is already reverberating. Samsung Electronics cited a surging won for missing results estimates. South Korea, meantime, contracted quarter-over-quarter in the fourth quarter. The sizeable, open economy is often a weathervane of shifts in demand for Asian products. Singapore, also something of a bellwether, saw factory output drop 3.9 percent year-on-year in December.

Those headwinds will intensify if the greenback weakens further. In Japan, Prime Minister Shinzo Abe is prodding companies to raise wages to defeat deflation. Concerns about the yen, which has led recent gains among Asian currencies, could make executives even less inclined to fatten pay cheques. For China, maintaining growth north of 6.5 percent becomes yet more difficult as exports become pricier. The disadvantage Asian companies find themselves at versus their U.S. firms peers could prompt a re-evaluation of stock prices in the region.

The bigger risk is that Trump’s weak-dollar gamble kicks off a fresh confrontation over foreign exchange. His policy shift is aimed at China but Japan, Korea and Southeast Asian governments might feel obliged to cap, or intervene to weaken, exchange rates. Central banks in Seoul, Manila and elsewhere will be tempted to hold off raising interest rates, which would otherwise create further appreciation.

There’s little point in Asia trying to fight Trump’s Treasury Department. Central banks acting to curb local currency gains would be outgunned. Nations risk White House charges of exchange-rate manipulation, or direct retaliation via tariffs. More success might be had employing careful monetary and fiscal loosening and accelerating efforts to increase innovation, productivity and living standards. As Trump perfects the art of the depreciation, all Asia can do is soften the blow.

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