Analysis: Asia's double-edged currency sword

Mon Jan 2, 2012 9:14am EST
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By Emily Kaiser, Asia economics correspondent

SINGAPORE (Reuters) - The roller-coaster ride for Asian currencies, which saw only the yen and yuan post significant gains for the year against the U.S. dollar, is set to continue in 2012.

While Japan actively sought to stem the yen's rise -- drawing U.S. criticism last week -- China intervened to ensure the yuan ended the year at a new high. Both currencies appreciated roughly 5 percent in 2011 against the dollar.

The opposite approaches illustrate a dilemma facing Asian policymakers as they try to smooth out foreign exchange rate volatility, which shows no sign of abating in the new year. If the currency is too strong, exports get more expensive. Too weak, and imported inflation spikes and domestic buying power fades.

Singapore and South Korea provide two examples of how inflation can stay surprisingly high, even as declining global demand curbs exports and saps growth. Both the Singapore dollar and the won slipped against the greenback in 2011.

For Japan, which has been battling deflationary forces for two decades, rising prices would be a welcome change. Three times in 2011, Tokyo intervened in the currency market to try to weaken the yen, once with the help of Group of 7 nations after the March earthquake and tsunami, and twice unilaterally.

It was the solo moves that drew Washington's ire. The Treasury pointed out in its December 27 report to Congress on world currencies that the United States "did not support these interventions," and said Japan would be better served by taking steps to increase the dynamism of its domestic economy.

"The United States is saying, our recovery is dependent on the (U.S.) dollar not becoming too strong," said Yukon Huang, an economist with the Washington-based Carnegie Endowment for International Peace.

"It's worried that there will be a global move for people to depreciate" their currencies, he said.   Continued...