Tuesday, May 26, 2009

Dollar Vexes Asian Central Banks

Currency Purchases Seek to Keep Exports From Becoming More Expensive By JOHN MURPHY in Tokyo, PETER STEIN in Hong Kong and NEIL SHAH in London The decline in the dollar has prompted intervention from several Asian central banks worried that the weaker currency could be a further blow to exports. To combat the dollar's decline, central banks in South Korea, Thailand, Taiwan, Singapore and India are believed to have sold their currencies and bought dollars in recent weeks, notes Patrick Bennett, currency strategist with Société Générale in Hong Kong. Much of Asia's economy is geared toward exports, which were hit badly by a drop-off in U.S. and European demand. As the dollar falls against Asian currencies, Asian exports become more expensive, potentially adding a further drag on exports. Notably absent from the list of central banks buying dollars is Japan, which is particularly vulnerable to a weaker dollar. Investors lifted the yen to a two-month high against the dollar on Friday after Japan's finance minister said he isn't planning to stop the yen's recent rise. The dollar's weakness could also throw a wrench into the economic recovery of Europe, especially Germany, the region's biggest economy. The dollar soared last year as investors sought safe havens, but that move has begun to reverse itself as investors see growth resuming, particularly in Asia. That has led to an inflow of money from investors, pushing local currencies higher versus the dollar -- and prompting central banks to intervene in an attempt to slow the rise before it can derail the recovery. For some of Asia's export economies, the dollar's weakness isn't the key issue right now, as "exports are primarily demand-driven," says Peter Redward, head of Emerging Asia research at Barclays Capital in Singapore. But for central bankers still worried that their economies aren't out of the woods, "it's better to err on the side of caution at this stage," he says. The yen hasn't risen against the dollar as much as some other currencies have, reflecting worries about the long-term prospects for the Japanese economy. Since May 1, the dollar has weakened 4.5% against the yen, compared with a decline of 5.3% for the euro. On Monday, the yen briefly fell during the Asian day on news that North Korea had conducted a nuclear test and tested a short-range missile. But by the end of the global day, with trading thinned by holidays in the U.S. and the U.K., the currency was little changed. The dollar traded at 94.82 yen, from 94.81 yen late Friday. Among other currencies, the euro traded at $1.4011, up from $1.4004 late Friday and leaving it around its highs for 2009. The pound eased to $1.5913 from $1.5907, while the dollar traded at 1.0831 Swiss francs, from 1.0848 francs. Japan's exporters were stung by huge losses in the fiscal year ended March 31 because of the yen's appreciation over the previous 12 months. Currently, auto makers Toyota Motor Corp., Honda Motor Co. and Nissan Motor Co. are assuming the dollar will be valued at 95 yen this fiscal year, compared with their projection of 100 yen a year ago. But if the yen gains more ground, the impact for manufacturers would be devastating. Every time the yen strengthens by one yen, for instance, Nissan loses 11 billion yen ($116 million) in operating profit. Nissan lost 223 billion yen in operating profit last fiscal year because of foreign-currency fluctuations. Nissan Chief Executive Carlos Ghosn is aiming to reduce the company's exposure to the strong yen this fiscal year by sourcing more parts and components for Nissan's vehicles from outside Japan. Some 55% of the company's expenses in yen go to suppliers based in Japan, he said, a fact that needs to change if the company wants to avoid a projected loss of 170 billion yen in the current fiscal year. "You might have to take the hard step of shuttering plants in Japan. While this might bad for the Japanese economy, this would be something that would be very good for the auto makers," says Christopher Richter, a senior analyst at CLSA Asia-Pacific Markets in Tokyo. Japanese electronics makers, already suffering from the slide in prices for LCD televisions and digital cameras, are also being conservative, with most companies predicting the yen will trade between 90 and 95 yen to the dollar. Both Panasonic Corp. and Sony Corp., along with other key Japanese electronics firms, are considering shifting more of their production overseas as one way to combat the yen's rise. By making products outside Japan, those companies can pay parts suppliers and incur a greater percentage of their costs in dollars to offset some of the currency risk. Like Japan, Germany's economy depends heavily on exports. A stronger euro would make German exports that much more expensive and less competitive, removing one of the key legs of any European economic revival. The euro's strength is broader than just against the dollar. It has risen about 1.5% over the past four weeks against the currencies of the 16-nation euro zone's 21 major trading partners, according to UniCredit. Earlier this month, Germany's government said exports rose 0.7% in March from February, raising hopes that German's economy was stabilizing. "It would come at the worst possible time for Germany and Europe," said Andreas Rees, a Munich-based economist at UniCredit. To be sure, Germany isn't as reliant on U.S. buyers as some Asian export-dependent economies are; Germany also sells its wares to other nations in Central and Eastern Europe and Asia. In Britain, exports play an important role in the economy, but not like in Germany. Write to John Murphy at john.murphy@wsj.com, Peter Stein at peter.stein@wsj.com and Neil Shah at neil.shah@dowjones.com

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