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Permalink Reply by Robert Eberenz on October 14, 2010 at 1:44pm

I would agree that Asian currencies are arguably undervalued, except for Japan, which has recently soared in comparison to the U.S. Dollar. Japan is actually throwing around the idea that they will step in and sell Yen on the open market to curtail the huge rise, but they are equally upset with China and Korea for what they consider to be active exchange rate manipulation. A recent article in the FT.com gives a good summary of the current currency spats over here in the Eastern market, titled "Currency Warning to South Korea and China",

http://www.ft.com/cms/s/0/f6a51674-d676-11df-81f0-00144feabdc0.html

Intuitively, the fact that both Japan and Korea's currencies are higher against the dollar suggests that the rates between the two should not have changed much. I guess Japan just really wants it's currency to fall compared to foreign peers so they can ramp up their export profits.

China is definitely a force to be reckoned with on this issue, because yes the trade surpluses in China are breaking records and yes printing in the U.S. should be increasing the RMB value in comparison, but we really don't have any idea exactly what the exchange rate should be between the RMB and USD. Also China's economy is pumping and that means velocity of money is higher, which is the metric that actually produces inflation, so the value of the RMB against goods in their market may actually be decreasing, while the U.S. is in a near deflationary environment and we're still buying those products. We're seeing wages rise in China across the board, another sign of inflation, and asset bubbles in Real Estate prices also tend to lend themselves to an environment where the RMB is becoming weaker against assets within the boundaries of their own economy. This should be taking the heat off of China to "revalue" the currency, but Geitner, Bernanke, and Obama can't come up with a better scape goat for the time being. China's strong and deceivingly stable, so they're an easy target, but the West will soon have to answer for problems that are products of their own doing, and blaming China probably won't stick.

Permalink Reply by Steven S. Bammel on October 19, 2010 at 1:04pm

Robert,

Your article reminds us again that Korea must find ways to diversity its dependence on foreign markets, in particular, the US and Chinese markets.

It's interesting to see in the chart on the first page that the Korean economy is always growing/contracting at a more extreme rate than the US economy.

As I mentioned in a post on the Korean Language Learners group here, the capital inflows and outflows keep giving Korea whiplash.

And as you've made it clear in the article, decisions in the US are having an inordinate effect on the options Korean policymakers have in terms of interest and exchange rates.

Is it unreasonable to think there's a better way? Or is this just the way it is?