Why we care that the Thai baht is on fire

February 4, 2011, 10:31 PM UTC

Currencies are soaring in the parts of the world that helped the global economy recover. Will they now become what hampers it?

At a time when the world’s advanced economies stumble over huge debts and deficits, developing nations have been thriving. Emerging economies, especially around Asia, have led the global economic recovery by selling more goods and services abroad and by benefiting from the rebound in prices for everything from copper to coal and other commodities.

In 2010, global GDP leaped to 5% after contracting by 0.6% the previous year, according to the International Monetary Fund. Developing Asia — from Thailand to China to India — contributed to the bulk of this growth, growing 9.3%, compared with advanced economies from Japan to the U.S. to Europe growing only at a nimble 3%. Even at the height of the global financial crisis in 2009, developing Asia saw robust 7% growth, while GDP in the advanced world contracted by 3.4%.

When it comes to forecasting, these economies have been a much easier read for economists and investors compared to, say, Europe, as the region’s debt crisis has taken hold of Greece and Ireland and potentially Spain, Portugal, Italy and Belgium.

But for 2011, prospects in developing Asia are much murkier, thanks in part to the rise of their currencies, from the Thai baht to the Malaysian ringgit. Experts say it’s one of the wild cards that could potentially hamper global growth. Stronger currencies, especially in developing Asia where growth is largely driven by exports, make selling goods and services abroad relatively more expensive.

The baht rose by about 11% in 2010 – the second-strongest Asian currency after the Japanese yen. And so far this year, the ringgit has strengthened 0.4%, the most among Southeast Asian currencies.

Bernanke to blame?

The currencies are likely to appreciate even more against the U.S. dollar as U.S. Federal Reserve officials continue buying billions worth of bonds under its quantitative easing program. Fed chairman Ben Bernanke says it’s intended to give America’s economy a much-needed jolt, but one of the consequences of it is a weaker greenback that’s caused Asian currencies to soar. The $600 billion policy of buying government bonds has drawn criticism from officials in China and other developing economies. They say it’s pushing up prices for food, energy and commodities, as well as driving their currencies higher. On Thursday, Bernanke defended the program, saying that inflation in developing countries is largely due to rising demand for commodities by their own people as their economic picture improves.

Asian central banks have intervened in their currency markets to stem appreciation of their currencies against the US dollar, with mixed results. Many export largely to the U.S., and with stronger currencies, this puts them at a disadvantage with China, which also exports heavily to America. The baht, ringgit and other currencies in developing Asia aren’t pegged to the U.S. dollar like the Chinese yuan effectively still is. So when the greenback weakens, the yuan stays relatively stable against the US dollar while other currencies that float strengthen against the greenback.

Currencies in Asia aren’t the only ones surging. The Brazilian real has risen by more than 35% against the US dollar since early 2009. And Brazilian Finance Minister Guido Mantega has been more than vocal about the threats of a strengthening currency, telling reporters recently: “We’re not going to allow our American friends to melt the dollar.”

Some economists consider the real to be the world’s most overvalued currency, but Domenico Lombardi, senior fellow at Brookings Institution who specializes in international monetary relations and global currencies, says the rise of developing Asian currencies is especially concerning. The region drove the global economic recovery and further strengthening of their money could very well slow global GDP later this year. It’s true concerns over inflation in China (also the big driver in the world’s economic recovery) will also be a big factor. But it’s all interrelated.

“In the event that the Chinese central bank has to raise rates in a substantial way, this could certainly slow down growth in China with spillovers to other emerging [Asian] economies that trade with China,” Lombardi says.

Indeed, the economic picture of Asia has become much less certain. And it’s anyone’s guess what other variables might stand in the way of growth.

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