Additional Thoughts on a Weak Dollar

A couple of weeks ago we discussed some of the issues/opportunities that the dollar’s recent fall has presented.  One of these was the idea that countries who claim they don’t want to buy dollars may be forced to do just that.

This morning’s Wall Street Journal highlights the problems that some smaller Asian countries face with their currencies in relation to both the U.S. dollar and the Chinese yuan.  Because China has pegged its currency to the dollar, its exports have not gotten more expensive with the dollar’s decline.  However, this is not the case for Thailand, South Korea, and Malaysia.  They directly compete with China in exports to the U.S., and they have seen their currencies gain value.

As we discussed a few weeks ago, that leaves them with some unsavory choices:  buy tons of dollars to keep their currency from getting even more expensive, or let their currency appreciate, and write off a chunk of the export market.

Well, South Korea, Thailand, and Malaysia have been buying a lot of dollars to keep their currencies in check.  The problem is that they are not as big as China, so they cannot control it as much.  Combined, the three countries added more than $20 billion in U.S. dollar reserves in September, but their currencies still appreciated.

To say the least, they are annoyed with China’s pegging of the yuan to the dollar.  It is making it tough for these other Asian companies to compete.  One Thai business official is quoted in the WSJ article, explicitly calling for a weakening of the baht in relation to the dollar.  If other nations just dump their currencies into the open market, we may be setting the stage for inflation because money is likely to flood the system.