Driving commercial and political engagement between Asia, the Middle East and Europe
Driving commercial and political engagement between Asia, the Middle East and Europe
Phyllis Papadavid, Director of Research and Advisory at Asia House, assesses the implications of the strong US dollar for Asian economies.
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Key takeaways
Economic risks for 2023 have grown more acute, both in advanced and emerging economies. Asia is no exception. Vulnerability to shocks and their persistence and breadth will remain heightened in 2023 and will be catalytic in reducing global growth. Approximately one third of the global economy is likely to be in contraction in 2023 (IMF, 2022), fuelling the likelihood of a sub-two per cent global growth rate.
Chief among the global triggers will be financial developments in the US. The increase in US interest rates – coupled with US dollar strength – will bring about multifaceted changes in Asia’s economies. Those with high US dollar debt burden, high usage of the US dollar as a trade invoicing currency, and those that have high imports as a share of their economy, will shoulder more pronounced economic impacts in 2023.
US dollar strength may benefit Asia’s exporters in the form of resilience (and some cases hyperbolic growth) in US import demand, which has been buoyant and has coincided with US dollar strength post-COVID-19. And yet, the context that frames US dollar strength is unlikely to be beneficial for Asia and will limit competitiveness impacts from domestic currency depreciations.
Dollar dynamism will be driven by its status as a safe haven currency1 with global markets in risk aversion. Its strength is also likely to be complemented by comparatively greater monetary tightening by the US Federal Reserve.
Asia’s dollar dependence could take shape in the following ways:
In the months ahead, Asia’s economies that hold US dollar denominated debt, that are comparatively more open with high import shares, or that have accelerating inflation, will be worth watching. On this basis, Vietnam, China and Japan look to be more exposed to systemic downside risks. Asia will show resilience; its resource exporters are likely to continue to fare well and as a region, it will be a driver of global growth. And yet, the breadth of shocks – including a peak in inflation in 2023 rather than in 2022 – and continued risk aversion– suggests red flags for the outlook.
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NOTES
1. Safe haven currencies, or assets, are typically in higher demand as a store of value during times of global financial volatility; this link has predominantly been exhibited by the US dollar (Doroodian and Caporale, 2000).
2. This is notwithstanding positive valuation effects from a stronger US dollar.
REFERENCES
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Doroodian, K., and Caporale, T., (2000), “Currency risk and the safe-haven hypothesis” Atlantic Economic Journal, 28, 186-195.
IMF (2022), “Countering the cost-of-living crisis” World Economic Outlook Report October 2022, International Monetary Fund, Washington DC.
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