Monday, November 15, 2004

Stephen Roach is amazingly sanguine today on the future of a measured and managed dollar decline, orchestrated first and foremost by Japanese and Chinese central bankers who have seen the light and won't fight the "fundamentals" any more.
Asia now has to give and accept its role in accommodating the dollar's adjustment. I have made two treks to Asia in the past six weeks, and my sense is that Asian officials are now increasingly resigned to this responsibility. Japan and China are, of course, the linchpins to pan-Asian currency adjustments. While the latest Japanese GDP statistics were surprisingly soft, officials in Japan are nearly unanimous in believing that the Japanese economy is now strong enough to withstand the pressures of yen appreciation. In China, the near-term verdict is more guarded, but I get the sense in Beijing that the move to a more flexible foreign-exchange mechanism � either widening the bands on the existing dollar peg and/or shifting to a peg against a basket of currencies � is now likely to come sooner rather than later. I also got the impression from my travels elsewhere in Asia that diversification of foreign-exchange reserves is becoming an increasingly important objective of regional policy makers. Add to that current-account and dollar-related concerns expresses by senior Federal Reserve officials from the United States, and there is good reason to believe that the world has basically come together in attempting to manage the dollar lower.
Of course, this feels a bit too much like a Tom Friedman column ("I went to A and talked to X in his living room and he told me . . . then I had coffee with Y in a popular spot frequented by terrorists and he agreed with me . . . and then Z, a well-respected expert, confirmed everything I believe about the world . . ."), but I haven't been schmoozing with the transnational illuminati of late, so we'll have to take Roach at his word -- and with a pinch of salt.


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