Higher US dollar a net negative for Asia

Having appreciated more than 8 per cent this year, the US dollar is at close to a 20-year high on the dollar index, which measures it against a basket of six major currencies. It has also risen against Asian currencies as well as those of emerging markets. The dollar's strength, which is likely to continue, will create new strains for Asian economies but is unlikely to lead to a regional currency crisis as had happened in 1997-98. Two main forces have been driving the rise of the US dollar. One is the tightening of monetary policy by the US Federal Reserve since March, which will run through at least the rest of this year. The other is the "safe haven" effect of a flight to the US dollar, which is customary during periods of geopolitical instability, which the world is currently experiencing.

To combat price pressures as well as prevent sharp currency depreciations in the face of the rising US dollar, several countries in the Asia-Pacific have been forced to raise their interest rates recently, including Australia, New Zealand, India, and South Korea. Malaysia hiked its benchmark interest rate on Wednesday, while Indonesia and the Philippines are expected to do so this month. Singapore, which controls inflation through exchange rate policy, has tightened its stance three times since last October. Higher interest rates raise borrowing costs and slow down growth.

A stronger US dollar also creates problems for economies with large dollar-denominated debts. Both public and private debt levels have increased sharply during the period of near-zero interest rates from 2008 to last year. As interest rates rise, so do repayment burdens. According to the Bank for International Settlements, the outstanding US dollar debts of non-financial corporations of developing countries in the Asia-Pacific at the end of last year was US$909.4 billion (S$1.27 trillion), of which US$139.3 billion was due within one year. Besides governments, a lot of indebted companies in Asia are likely to face some financial stress arising from a strengthening greenback and higher US interest rates.

But despite these headwinds, Asia's economies are well placed to weather the rise of the dollar. Their growth will benefit from the reopening of their economies as Covid-19 restrictions are lifted. They may also gain some export competitiveness from weaker currencies - although this may be tempered by higher import costs for food and fuel and slowing growth in their big export markets. And unlike during the Asian crisis of 1997, most of them have adequate reserves to defend their currencies. Nascent local-currency swap arrangements in the region may also help them reduce their dependence on the US dollar, at least for payments. So while the stronger US dollar will be a net negative for Asia, its impact is likely to be manageable - at least so far.