Forget the strong dollarThe U.S. dollar is strong, rising 20 percent in the past six months compared to the currencies of major trade partners. Such a significant rise in a short period of time is rare. The strong dollar trends in 1980 and 1995 are the only precedents.
And the gloomy memories are coming back of currency crises in emerging countries. In 1980 there was the Latin America debt crisis. In 1995 Mexico and Asia were hit by financial troubles. Dong Tao, the chief regional economist for Non-Japan Asia at Credit Suisse said that an empowered U.S. dollar ravages the vulnerable parts of the global economy like a dinosaur venting suppressed power.
When a certain experience is repeated more than twice, it is perceived as a rule. Domestic and international experts are responding sensitively to every phrase of the Fed’s statements more than ever. When the Fed reveals its intention to increase the interest rate, the value of the dollar goes up, and emerging economies are reminded of the currency crisis.
Various signs have already appeared. The currencies of Brazil and Venezuela plummeted. The fall of international oil and raw material prices have negatively affected their trade balances. The strong trend of major treasury bonds is also fanning uncertainty. Harvard University Professor Martin Feldstein warned that the bond price is too high and far from the historical average, adding that the Fed’s interest rate increase could change the situation drastically.
Just as in 1980 and 1995, a serious crisis could happen somewhere in the globe. However, just because a certain symptom has been repeated in the past, it does not constitute fact. The U.S. currency contraction does not mean the beginning of a currency crisis. Other factors are also influential.
In 1997, Japan supported the Federal Reserve’s curtailment and absorbed market funds recklessly. Back then, Japan and the United States were the two major capital sources. Just as Dong Tao of Credit Suisse told me in an interview, Japan was Jupiter to the United States’ Sun in the solar system of global capital. The currency crises of emerging economies were caused by simultaneous contractions of multiple capital sources.
Unlike the Fed, the European Central Bank and the Bank of Japan use quantitative easing (QE). The corporate bond annual yield rate is 2 to 3 percent. Just in time, ECB President Mario Draghi suggested maintaining QE and low-interest rate policy until 2017 in a meeting with JoongAng Ilbo’s adviser Sakong Il. An emerging economy that has substantial health and the ability to raise funds in the market may not be at helpless during the strong dollar trend as it was in 1997.
The author is the deputy business news editor of the JoongAng Ilbo.
JoongAng Ilbo, Mar. 23, Page 30
by KANG NAM-GYU