Singapore: Asian central banks would hurt themselves if they dumped dollars from their foreign reserves because that would quickly reduce the value of those holdings, the head of the Asian Development Bank (ADB) said.
Asian central banks have been diversifying their reserves, worth $4.48 trillion at the end of May, out of the dollar and into euros and other currencies, to avoid dollar weakness.
“It’s very difficult for large asset-holders to do so, because their dollar assets will depreciate”, ADB president Haruhiko Kuroda said at a seminar in Singapore on Monday.
The banks bought large amounts of foreign currency as part of interventions in the foreign exchange market aimed at keeping their currencies competitive. Some have also sold dollars to support their currencies at the height of the financial crisis.
Investors fret any move to dump the dollar, which may send the currency into a nose-dive and push up US interest rates.
The dollar would remain the world’s reserve currency for the foreseeable future, although countries could explore alternatives over the longer term, Kuroda said.
“Countries should avoid competing against each other’s currency depreciations, or appreciations in some cases.”
A $120 billion emergency fund designed to help Asia avert a balance of payments crisis would be completed and implemented by the end of this year, he said.
But countries must step up structural reforms to reduce their reliance on exports, as US households have started to save more and spend less, dampening demand for Asian goods. “Rebalancing the source of growth is not an option, but the necessity.”
He cited recent moves by the Chinese government to shore up health care and education to cut the high savings rate.
Signs of recovery
Signs of an economic recovery had emerged in Asia, led by robust factory and investment data in China, but the ADB had yet to change its outlook, Kuroda said.
Kuroda also played down the risk of inflation, which may pose a long-term threat: “At the moment, we are not concerned about the resurgence of inflation.”
Last week, the World Bank raised its growth outlook for China to 7.2% this year from 6.5% as a nearly $600 billion stimulus gains traction. But it cautioned that a robust recovery was unlikely given global weakness.
The ADB has forecast growth in developing Asia to slow to 3.4% this year from 6.3% last year due to poor exports.
But growth was likely to accelerate to 6.0% in 2010 as the big economies recover in the second half of the year, the bank said in its forecast issued in March.