Competitive Currency Devaluation

This week is quite busy as I'm catching up with work after long absent from work. Here is a piece from WSJ talking about competitive currency devaluation. US $ is a winner as long as the global economy is weak?! See you all during weekend.

(WSJ)Desperate times call for desperate measures.

Signs are mounting that Taiwan's central bank has gone from trying to keep its currency from falling too fast to actually holding it down.

Such a move, ostensibly aimed at giving the country's exporters some relief from crumbling markets, is guaranteed to irk the island's neighbors. At least, that is, until it inspires them to follow the same path.

It isn't uncommon for Taiwan's central bank to smooth the day-to-day moves of the New Taiwan Dollar by buying or selling the currency and others. Lately, though, currency traders have said the bank has been most active in selling its own currency, and buying U.S. dollars.

Analysts at HSBC estimate the central bank bought a net $1.5 billion in November alone, becoming a net buyer for the first time since the Taiwanese currency started to fall in August.

The central bank declined to say what its approach is, but acknowledged that it is intervening to ensure the exchange rate is not "incompatible with fundamentals." Those fundamentals would almost surely include a nearly 42% decline in exports in December.

The currency is down nearly 2% against the U.S. dollar -- and almost 9% against a stronger yen -- since the end of September.

This week, Taiwan reported that its foreign-exchange holdings rose by 4% in December, from November, and 8% from December last year. That's the second consecutive monthly increase -- and the strongest evidence yet of the central bank's swing from seller of U.S. dollars to buyer. The reserves are now worth $292 billion.

Taiwan isn't alone in holding its currency lower. Hong Kong has openly been selling its currency for the last two months, although that's to maintain its currency peg against the greenback.

And there are signs that others could be doing the same thing. Several Asian exporters which have already released data on last month's reserves have reported increases from November levels -- although it's only in Taiwan's case that traders claim knowledge of the central bank's intentions.

In either case, other exporters can hardly sit by and watch Taiwan make such moves without responding. One chief rival in the electronics sphere -- South Korea -- has room to breathe. The won is down 28% against the New Taiwan dollar over the past year.

Still, now that the Taiwanese currency has joined the devaluation game, it's down 8% against the won since early December.

Concern about falling Asian currencies is starting to look passe. Instead, the Year of the Ox could bring with it the real possibility that Asian currencies will engage in a depreciation cycle against the dollar.