Guest Contribution: “Undervaluation of Asian currencies”
Today, we present a guest post written by Jeffrey Frankel, Harpel Professor at Harvard’s Kennedy School of Government, and formerly a member of the White House Council of Economic Advisers. An earlier vesion in Project Syndicate. August 17 – Observers of international monetary economics have shifted attention back to the exchange rates of Asian currencies. The concern is […]
In a recent guest post, Jeffrey Frankel, a Harv ard professor, discusses the undervaluation of Asian currencies, specifically the Chinese yuan, Japanese yen, and South Korean won. All three countries maintain substantial trade and current account surpluses while the United States runs corresponding deficits. However, experts like Brad Setser and Gopinath, Gourinchas, and Rey argue that the US-China exchange rate is not the root cause of current account imbalances, and thus, it does not warrant action from other countries.
Frankel points out that China, Japan, and South Korea have all been accused of using undervalued currencies to sustain their trade surpluses. The US Treasury has intervened in the foreign exchange market to boost the value of the yen, marking the first time such an action has taken place in this century. This intervention came in cooperation with Japanese authorities and was reminiscent of the Plaza Accord of 1985.
The US Treasury Secretary, Scott Bessent, stated that many Asian currencies follow the Japanese yen, leading to speculation that the intervention was motivated by concerns over rising Japanese interest rates, which would subsequently increase US interest rates.
The effectiveness of foreign exchange intervention is debated among economists, with some arguing that it can only impact exchange rates if it alters countries' money supplies. The most notable example of successful foreign exchange intervention was the set of coordinated actions during the Plaza Agreement of 1985, which succeeded in lowering the dollar's value. However, such interventions have been rare since the turn of the century, making it difficult to assess their true impact.
The bi-annual US Treasury Report to Congress on Macroeconomic and Foreign Exchange Policies of Major Trading Partners has long listed Asian currencies on a Monitoring List for examination. This report, issued in July 2023, did not name any country as currency manipulators, but maintained China, Japan, and South Korea on the list due to their substantial trade and current account surpluses.
Critics argue that bilateral trade balances are not the best criterion for assessing currency undervaluation, highlighting the need to consider factors like national saving, high investments, and productivity adjustments instead.
Written by urgent.news from Econbrowser's reporting — not their text. Machine-written — may contain errors; check the original before relying on it.
