So why should we pay so much attention to the six leading central bank governors in Asia? Quite simply because if any one of them decided to diversify his country's exchange reserves aggressively out of dollars, the kind of currency market jitters we saw this week would pale into insignificance. Furthermore, if Asian central banks merely decide to follow South Korea in ceasing to buy new US assets, economists estimate that the interest rate on long-dated treasuries could rise by 0.4 to 2 percentage points.
In short, one of the main drivers of monetary conditions in the US is the Asian central banker.
This is the point I was making in my dialogue with Roger. It remains to be seen if the Fed still has the same flexibility to act in a crisis but my guess is that they don't. This will be especially true if the crisis begins in the U.S., limiting the a flight to quality response the U.S. bond market normally sees.
If you just can't read enough about the U.S. dependence of Asian central banks, you can check out the China Stock blog's summary of a Barron's article. The gist of the article is that China's peg is not so bad. One argument they make is that a yuan appreciation is not a given in a free market because all emerging market currencies are undervalued based on purchasing power. I think you could drive a large truck between the yuan's current value and "undervalued based on purchasing power" but a more thorough approach is to compare values across emerging economies. I have not read the Barron's article but the summary was food for thought.
The FT has a story on new Chineese currency reforms. It Doesn't look like anything earth shattering though the headlines read positively.
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