Even though his bet against the dollar cost him $310 million in the first quarter alone, Warren Buffett is sticking with it. Alan Greenspan seems less worried about the world’s top currency.
Who’s Asia to trust when the two most revered U.S. gurus in this region are at odds?
The issue is far from academic, something that’s clear from the intense interest among policy makers here in Istanbul for the annual Asian Development Bank meeting. Be it discussions about growth outlooks, poverty or infrastructure, the risk of a dollar crisis is sure to come up.
It troubles many Asians that a man as admired as Berkshire Hathaway Inc.’s Buffett could so publicly bet on a plunging dollar. It’s fine for George Soros to be down on the dollar given his distaste for the Bush administration; it’s another to see the “Sage of Omaha” doing the same.
The sense of confusion is heightened by Federal Reserve Chairman Greenspan’s assurances that a scenario like the one Buffett fears isn’t likely.
Admittedly, Greenspan’s view is highly nuanced. He warns U.S. deficits are unsustainable, yet tends to stress that in the age of globalization, capital markets are so large and flexible that economies can handle larger imbalances — ones that can be unwound with minimal disruption.
China Peg
Greenspan’s No. 2 at the Fed, Roger Ferguson, put it this way recently: “My sense is that the implications of current-account adjustments for U.S. economic growth and inflation will most likely be benign.”
Record U.S. current account and budget deficits don’t seem to be getting many headlines in Washington, yet they’re Topic A in a region that’s highly vulnerable to a sliding dollar. There are myriad reasons why a dollar crisis would be dreadful news for Asia.
Of course, the dollar isn’t the only currency in the news. Speculation that China may soon alter its peg to the dollar is hitting a fever pitch here in Istanbul, where top finance officials from China, Japan and South Korea met yesterday.
While no deal was struck, and China remained coy about its plans for the yuan, currency matters are eclipsing just about all else. Here, much of the attention is on the dollar, and for good reason.
Developing Economies
It’s widely expected that a yuan revaluation will result in a stronger Chinese currency. That would make Japanese steel, Malaysian palm oil and Thai rubber more affordable for buyers in China, whose 1.3 billion people are the world’s biggest consumers of cell phones, motorbikes and televisions. And so, Asians are anxious to see China change its currency regime.
That’s not so with the dollar. While the Fed’s monetary tightening cycle has stabilized the dollar, the worsening trade position of the world’s biggest economy is increasingly irking investors.
For one thing, the shockwaves it would send through the global financial system may drive investors out of developing economies like those in Asia. For another, well over $2 trillion of Asian currency reserves are parked in foreign assets, mainly dollar ones. As the dollar falls, losses mount at Asia’s central banks.
It hardly helps that any drop in the dollar makes China stronger. Since its currency is pegged to the dollar at 8.3, each ratchet downward in the dollar’s value makes Asia’s most vibrant economy even more competitive. And even if China revalues the yuan soon, it’s only likely to move a small amount.
Record Deficit
A plunging dollar might prompt Japan to re-enter the currency markets to keep the yen from rising too much. That would put the onus on governments from Seoul to Bangkok to follow suit.
Not surprisingly, many Asians hope the Fed’s take on the dollar’s outlook wins out over Buffett’s. Trouble is, the laws of economics may be with Buffett on this one.
Investors often roll their eyes when Asians rattle on about trimming their vast holdings of U.S. Treasuries. And here, skepticism is warranted. After all, Asians also know that any move to unwind Treasury positions could lead to even bigger losses on their dollar holdings.
Yet there’s little in the Bush administration’s economic plans to tackle U.S. deficits. It projects the federal deficit will reach a record $427 billion in the current fiscal year, which ends Sept. 30. If efforts are afoot to get U.S. finances under control, Asians don’t know about them. Ditto for the current account deficit, which reached an unprecedented $665.9 billion last year.
`Toast’
It would help if Asia were less dependent on the U.S. consumer. While the region reduced foreign currency debt, strengthened banking systems and attacked corruption after the 1997-1998 Asian crisis, it remains dangerously dependent on the U.S. economy.
“Should the U.S. consumer cave — a distinct possibility in the event of a long overdue current account adjustment — Asia would be toast,” says Stephen Roach, Morgan Stanley’s global chief economist.
Asia is still trying to figure out whether Greenspan or Buffett will end up being right about the dollar. While it hopes Greenspan is right, it knows Buffett has a point.
By William Pesek Jr.
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