ADB finds dollars dull SE Asian financial controls

Vietnam has made progress in dealing with dollarization but more efforts are needed to enhance confidence in the local currency, the Asian Development Bank said in a statement last week.

The Manila-based bank just published a study about the economic impact of having multiple currencies circulate in Vietnam, Laos and Cambodia. In these countries, the bank found, foreign currencies are widely used, particularly the US dollar.

“The share of foreign currencies ranges from around 20 percent of all currency in circulation in Vietnam, about 50 percent in Lao PDR, and more than 90 percent in Cambodia,” the bank said.

ADB said that, aside from certain benefits, the use of multiple currencies reduces economic authorities’ control over monetary and exchange rate policies.

“Dollarization blunts the tools for macroeconomic stabilization, especially monetary and exchange rate policy, that a country like Vietnam needs in order to tackle a variety of economic and developmental challenges, such as rising inflation,” said Jayant Menon, Principal Economist in ADB’s Office of Regional Economic Integration.

“Vietnam has made good progress in de-dollarization,” says Ayumi Konishi, ADB Country Director. “Yet, authorities, especially the State Bank of Vietnam, are fully aware that administrative measures alone cannot be effective… it is essential to enhance people’s confidence in Vietnamese dong through sustainable and high economic growth, stabilization of the foreign exchange rate, reforms in monetary policies, and strengthening of the capacity of financial institutions.”

The study also suggested that “sharing information and experiences would help the monetary authorities of Cambodia, Lao PDR, and Vietnam to find a solution to the dollarization issue.” The three countries have a lot to gain from closer cooperation, it added.

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Call to boost faith in dong

US dollar transaction at Quoc Trinh Gold Shop in Ha Noi. About 20 per cent of all currencies in circulation in Viet Nam are foreign. — VNS Photo Truong Vi

HA NOI — Viet Nam should expend more effort in raising people's confidence in the dong, while co-operating with neighbouring countries on resolving overuse of foreign currencies, the Asian Development Bank said in its latest study.

Regional co-operation on monetary and financial issues to exploit economies of scale, introduce good practices and facilitate the adoption of common regulatory standards will help the country tackle economic and developmental challenges posed in the transitional period, the book Dealing with Multiple Currencies in Transitional Economies: The Scope for Co-operation in Cambodia, the Lao People's Democratic Republic, and Viet Nam, stated.

"Dealing with dollarisation and multiple currencies is ultimately an issue of national economic policy, and in this regard, Viet Nam has made good progress in de-dollarisation," Ayumi Konishi, ADB Viet Nam country director said at the book's launch in Ha Noi last Friday.

"Yet, authorities, especially the State Bank of Viet Nam, are fully aware that administrative measures alone will not be effective."

In order to de-dollarise the Vietnamese economy, it is essential to enhance people's confidence in the Vietnamese dong through sustainable and high economic growth, stabilisation of the foreign exchange rate, reforms in monetary policies, and by strengthening the capacity of financial institutions, the ADB representative said.

The study shows other countries' currencies, particularly the US dollar, are in wide use in the three Indochinese countries – Laos, Cambodia and Viet Nam.

In Viet Nam, about 20 per cent of all currencies in circulation are foreign; in Laos the figure is 50 per cent; while in Cambodia it is 90 per cent.

The study highlighted the costs and benefits of dollarisation. On the plus side, dollarisation can impose discipline on governments since they cannot easily finance budget shortfalls by printing money. In addition, if dollarisation leads to a near fixed exchange rate, prices can be less volatile.

However, the use of multiple currencies reduces the control of economic authorities over monetary and exchange rate policies. It also restricts the power of central banks to act as "the lender of last resort" in the event of a banking crisis, the study said.

"Dollarisation blunts the tools for macroeconomic stabilisation, especially monetary and exchange rate policy, that a country like Viet Nam needs in order to tackle a variety of economic and developmental challenges, such as rising inflation," the book's co-editor Jayant Menon, principal economist at ADB's Office of Regional Economic Integration, said.

Meanwhile, sharing information and experiences would help the monetary authorities of Viet Nam, Lao and Cambodia find a solution to the dollarisation issue, said co-editor Giovanni Capannelli, principal economist at the ADB. — VNS

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Asia stocks hit 2-year high, dollar rises vs yen

Photo: Reuters

HONG KONG - Asian stocks shot to a two-year high on Monday, boosted by interest in emerging markets, while the dollar edged up after last week's selloff though speculation the Federal Reserve will add to money supply was still rife.

European stocks were between half a percent and 1 percent lower in early dealings, with the benchmark FTSEEurofirst 300 down 0.75 percent, extending a five-day retreat.

The dollar remained close to an eight-month low against a basket of major currencies, with expectations increasing the Fed will resort to a second round of bond purchases before the year is over to support the US economy.

By contrast, Chinese manufacturing activity has held up surprisingly well, keeping investors confident about the region's prospects and pushing up the MSCI index of Asian stocks outside Japan to the highest level since June 2008.

"Continued foreign buying, amid the US dollar's recent weakness and an increasing preference for emerging market stocks, has lifted the market to a new high," said Lee Jin-woo, a market analyst at Mirae Asset Securities in Seoul.

Strong foreign portfolio flows into the region have lifted Asian currencies, putting pressure on regional central banks to step up intervention to limit the inflow of speculative "hot money" and to support their export-oriented economies.

Financial leaders gather for the International Monetary Fund meeting this week and the concept of countries keeping their currencies weak for export-gain is likely to be a hot topic.

Japan's Nikkei closed 0.3 percent lower in choppy trade ahead of a Bank of Japan policy decision on Tuesday.

The dollar surged against the yen in a short-covering rally as the Japanese currency retreated against other currencies as investors unwound some long yen positions ahead of the BOJ meeting.

Central banks on tap this week

Former BOJ Deputy Governor Toshiro Muto said on Friday the central bank may ease policy as inaction would run the risk of spurring further yen gains, given the prospects for easing by the US Federal Reserve.

Traders are not expecting the BOJ to make a substantial change to policy but may hold off on big bets on the yen ahead of central bank meetings in Britain and the euro zone on Thursday, as well as the September US payrolls report on Friday.

"Nervous trade will likely continue this week, even after tomorrow's event, as US jobs data is also set to be released later in the week," said Hiroaki Kuramochi, chief equity marketing officer at Tokai Tokyo Securities.

The MSCI index of Asia Pacific shares outside Japan, which has risen for six consecutive weeks, was up 1.1 percent with a 2.3 percent gain in the energy sector leading the pack on the back of firm crude prices.

Hong Kong's Hang Seng index led regional exchanges, rising 1.4 percent, with oil-related stocks such as CNOOC Ltd providing the most support to the market.

Petrochina Co., the world's second-most valuable oil and gas producer, was up 3.7 percent in Hong Kong.

US crude futures were steady near a two-month high at $81 a barrel, having risen $5 in the past week on the dollar's weakness and as a strong revival in Chinese manufacturing by a mid-year lull appeared to soothe fears of a new downturn in the global economy.

The dollar looked vulnerable against a basket of currencies, hovering near Friday's eight-month low, but had edged up 0.2 percent against a basket of currencies in Asian trade.

"It's still a dollar-negative situation but short-term probably the market has priced a lot in," said Masafumi Yamamoto, chief FX strategist Japan at Barclays Capital.

Asian currencies, such as the South Korean won and Taiwanese dollar, climbed against the dollar, despite an estimated $18.8 billion spent by regional central banks last week to keep their currencies weak, according to estimates from traders compiled by IFR Markets.

The potential of significant amount of cheap money being added to the financial system via the Federal Reserve continued to support gold prices.

The precious metal was up 0.2 percent to $1,317.55 an ounce, after hitting a fresh record of $1,320.80 on Friday on sustained dollar weakness.

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Dollar struggles, hovers near 15-year low vs yen

Less-dire-than-expected U.S. payrolls data last week eased market anxiety over chances of a global slowdown and boosted demand for growth-linked currencies

Photo: Reuters

LONDON - The dollar dipped on Monday and looked set to test a 15-year low against the yen after shedding gains made after U.S. jobs data, while better risk appetite kept the euro near a three-week high versus the U.S. currency.

Less-dire-than-expected U.S. payrolls data last week eased market anxiety over chances of a global slowdown and boosted demand for growth-linked currencies like the Australian dollar.

"We are seeing some relief from fears about a double-dip recession in the U.S. helping risk sentiment and the euro," said Gareth Berry, currency strategist at UBS. "But whether this sentiment can be sustained or not is difficult to say."

U.S. non-farm payrolls fell 54,000, a much smaller drop than the predicted 100,000. Private employment, considered a better gauge of labour market health, increased 67,000.

Rising risk appetite has tended to help the euro and higher- yielding currencies in recent months, as investors increasingly see the dollar as a funding currency for investments on expectations of a prolonged period of near zero U.S. rates.

The euro was at flat for the day at $1.2890, having earlier risen to $1.2918, its highest since Aug. 12. Resistance is seen around $1.2932, the Aug. 12 high.

Market participants said they believed Asian central banks, excluding Japan, are converting dollars into euros after they intervene to rein in gains in their own currencies against the greenback, further boosting the euro.

The dollar index was down 0.1 percent at 82.02 with support at 81.82 -- the 50 percent Fibonacci retracement of the index's rise from 80.085 to a high of 83.559, in August.

Yen long positions trimmed

The dollar also ceded ground against the yen, dropping 0.25 percent to 84.07 yen, not far from last month's 15-year low of 83.58. It had risen to 85.23 after the jobs data, but quickly erased the gains.

Dollar/yen has been very highly correlated with U.S. bond yields in recent months. The lower U.S. yields are, the cheaper the dollar is against the yen, as lower yields tend to discourage investment in the dollar from Japan.

In the past month, the yield on the benchmark 10-year U.S. Treasury note has shed 12 basis points, while the dollar/yen has fallen over 1.5 percent during the same period.

Investors have also bought yen in the past few months as they tend to favor currencies of countries with a current account surplus when they want to avoid risk. The rise had caused headaches for Japanese policymakers battling deflation at home and counting on exports to jump-start the economy.

Speculators trimmed their long positions on the yen last week but still have big yen long positions, data from the U.S. Commodity Futures Trading Commission showed on Friday. Net long positions were cut to 49,904 from 51,069 contracts.

Berry at UBS said hedge funds were selling dollar/yen while other asset managers were emerging as bit buyers. He added hedge funds believed U.S. data would remain soft, putting downward pressure on U.S. yields and dollar/yen.

On Saturday, Japanese Finance Minister Yoshihiko Noda said Tokyo would take decisive steps to stem the yen's rise when needed while suggesting coordinated currency intervention in the market was a difficult option.

"For intervention to work, it has to be coordinated and it does not look that the U.S. is prepared for that," said Bilal Hafeez, foreign exchange strategist at Deutsche Bank.

"So going solo by the Japanese authorities could work for a day, but unlikely beyond that. We are looking for the dollar/yen to fall to 80 yen in the medium term."

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Dollar struggles, hovers near 15-year low vs yen

Less-dire-than-expected U.S. payrolls data last week eased market anxiety over chances of a global slowdown and boosted demand for growth-linked currencies

Photo: Reuters

LONDON - The dollar dipped on Monday and looked set to test a 15-year low against the yen after shedding gains made after U.S. jobs data, while better risk appetite kept the euro near a three-week high versus the U.S. currency.

Less-dire-than-expected U.S. payrolls data last week eased market anxiety over chances of a global slowdown and boosted demand for growth-linked currencies like the Australian dollar.

"We are seeing some relief from fears about a double-dip recession in the U.S. helping risk sentiment and the euro," said Gareth Berry, currency strategist at UBS. "But whether this sentiment can be sustained or not is difficult to say."

U.S. non-farm payrolls fell 54,000, a much smaller drop than the predicted 100,000. Private employment, considered a better gauge of labour market health, increased 67,000.

Rising risk appetite has tended to help the euro and higher- yielding currencies in recent months, as investors increasingly see the dollar as a funding currency for investments on expectations of a prolonged period of near zero U.S. rates.

The euro was at flat for the day at $1.2890, having earlier risen to $1.2918, its highest since Aug. 12. Resistance is seen around $1.2932, the Aug. 12 high.

Market participants said they believed Asian central banks, excluding Japan, are converting dollars into euros after they intervene to rein in gains in their own currencies against the greenback, further boosting the euro.

The dollar index was down 0.1 percent at 82.02 with support at 81.82 -- the 50 percent Fibonacci retracement of the index's rise from 80.085 to a high of 83.559, in August.

Yen long positions trimmed

The dollar also ceded ground against the yen, dropping 0.25 percent to 84.07 yen, not far from last month's 15-year low of 83.58. It had risen to 85.23 after the jobs data, but quickly erased the gains.

Dollar/yen has been very highly correlated with U.S. bond yields in recent months. The lower U.S. yields are, the cheaper the dollar is against the yen, as lower yields tend to discourage investment in the dollar from Japan.

In the past month, the yield on the benchmark 10-year U.S. Treasury note has shed 12 basis points, while the dollar/yen has fallen over 1.5 percent during the same period.

Investors have also bought yen in the past few months as they tend to favor currencies of countries with a current account surplus when they want to avoid risk. The rise had caused headaches for Japanese policymakers battling deflation at home and counting on exports to jump-start the economy.

Speculators trimmed their long positions on the yen last week but still have big yen long positions, data from the U.S. Commodity Futures Trading Commission showed on Friday. Net long positions were cut to 49,904 from 51,069 contracts.

Berry at UBS said hedge funds were selling dollar/yen while other asset managers were emerging as bit buyers. He added hedge funds believed U.S. data would remain soft, putting downward pressure on U.S. yields and dollar/yen.

On Saturday, Japanese Finance Minister Yoshihiko Noda said Tokyo would take decisive steps to stem the yen's rise when needed while suggesting coordinated currency intervention in the market was a difficult option.

"For intervention to work, it has to be coordinated and it does not look that the U.S. is prepared for that," said Bilal Hafeez, foreign exchange strategist at Deutsche Bank.

"So going solo by the Japanese authorities could work for a day, but unlikely beyond that. We are looking for the dollar/yen to fall to 80 yen in the medium term."

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