What a difference a year makes

Business Times - 30 May 2008

What a difference a year makes

THIS time last year, the central banks of Asian countries such as India, Indonesia and the Philippines were trying their best to slow the US dollar's slide against their home currencies. By Tuesday this week, traders reported that at least four Asian central banks had intervened to stop the US currency from rising too fast instead.

More than one reason has been forwarded for this sharp turnaround, but the most important one has to be the stratospheric surge in oil prices. A year ago, they were trading at something like US$70 per barrel, now they are threatening to double that, or go even higher. Researchers at US investment bank Goldman Sachs, among the first to predict oil would surpass US$100 per barrel, now warn it could even reach peaks twice as high.

Over the past year, a fast-falling US dollar, rising demand and increasing speculative interest have combined in ugly fashion to boost all manner of commodity prices to one record high after another. As a result, we learned this week that Indonesia has been obliged to raise its subsidised oil prices by some 30 per cent. Taiwan is also removing oil price controls, and has announced graduated increases in the prices of oil, electricity and utilities. Both countries' central banks were among those believed to have slowed the greenback's rise against their currencies this week. In the face of such unprecedented price pressures, some obvious winners and losers have emerged in currency terms, and here's what it has appeared to come down to.

Countries with strong and growing external accounts may just have to let their currencies appreciate faster in order to deflect imported price pressures. On the other hand, those who suffer large current account deficits will have to tighten up at home if they don't want to find themselves paying more and more - in local currency terms - for food and energy imports.

In the first category, the most obvious candidates are China, Japan and the countries of the oil-rich Gulf. Far less fortunate would be countries such as India, Indonesia and the Philippines. In the case of the latter, Barclays Capital researchers have already warned of interest rate hikes over the coming quarters. For India specifically, a US$100 billion oil import bill and a sharp reversal in portfolio flows has now convinced JPMorgan researchers to raise their end-2008 target for the US dollar to 45 rupees, from 40 rupees earlier.

At the other extreme, two US investment banks recently suggested that those with fixed US dollar peg currencies - such as those in the oil-rich Gulf and Hong Kong - may have no choice but to let their currencies rise against the greenback to relieve rising price pressures at home.

At home, the Monetary Authority of Singapore has kept the trade-weighted Singapore dollar on an appreciating path to defuse imported pressures. With local inflation at a 26-year high, it's clear that's the only way to go.


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