The U.S. dollar continued to weaken in Asian trading Friday, with the euro hitting a record high above 1-33 to the dollar. In recent weeks, Asian currencies have also moved higher against the greenback. The trend has raised concerns of an economic slow down in Asia.
Financial authorities across the region are watching the dollar's movement closely. The Korean won has gained some 12 percent against U.S. dollar this year - reaching a seven-year high this week. The Japanese yen has risen about five percent against the dollar.
Economists warn that the dollar's continued slide could hurt Asia's economic performance.
Exports power Asian economies. Stronger local currencies, however, mean that Asian products sold to major markets, such as the United States and China, are now more expensive.
Thio Chin Loo is a currency strategist at the French bank, BNP Paribas, in Singapore.
"It would be a problem if Asian economies slow down, particularly if growth remains export-led and therefore, stronger currencies would tend to hurt exports," she explained.
Export growth is already slowing in some Asian economies such as South Korea and Singapore - which supply the world with electronic products. Exports account for 40 percent of South Korea's economy and in a recent survey, a majority of exporters polled said the won's strength would hurt their business. The Commerce Ministry says a 10 percent appreciation of the won would cut exports by the same rate.
And with the world's 11th largest economy suffering from a slump in domestic consumption, South Korean authorities are working to stave off bigger problems. The central bank has been buying dollars to keep the won from rising further.
The Japanese central bank also has indicated that it will protect the yen should the dollar rise too rapidly. The Japanese economy inched out of its long economic slump earlier this year, but in the latest quarter, growth flattened. The United States is Japan's biggest trading partner.
Masahiro Kawai, an economics professor at Tokyo University, says the government does not want to see the recovery jeopardized by a strong yen.
"The degree of the dollar depreciation is not that significant yet, but if the dollar continues to weaken, then it's possible that the current economic recovery may be affected negatively because of its impact on Japanese exports," he said.
Economists say countries with buoyant domestic demand and strong government spending have a better chance of escaping the weak dollar's negative effects. Exports by some Southeast Asian countries to other Asian nations and to Europe have been increasing.
Some experts suggest that Asia will retain its competitiveness in Europe because the euro has strengthened more than Asian currencies.
Ms. Thio in Singapore says stronger Asian currencies also may have benefits, such as helping stave off inflation.
"Inflation in Asian countries has bottomed out and inflationary pressure is expected to rise next year, a strong currency would help to ward off imported inflation especially on the commodity price front, where, for example, oil price is till high," she said.
As the dollar falls, the United States is keeping pressure on China to implement a more flexible exchange rate system. Its currency, the yuan, is pegged to the dollar - so Chinese products sold to the United States remain relatively cheaper than goods from other Asian nations. Washington says the peg causes a huge trade imbalance.
Professor Kawai says Asian nations are awaiting China's next move on its currency, also called the renminbi.
"It may be easier for other currencies if the renminbi is revalued," he noted, "because China is a big economic power in East Asia - its export competitiveness is very strong. But if the Chinese renminbi goes up in value, other countries would sit easier to adjust their exchange rates."
China pledges to move toward a flexible exchange rate system - but says it will do so carefully and only when the time is right. It has already raised interest rates and allowed limited capital to leave the country, but analysts say these are not enough to cool China's overheating economy.
But economists say a Chinese revaluation would only solve half the problem. They say the weak dollar stems from U.S. overspending, and its record budget and trade deficits. The Bush administration says it is committed to a stronger dollar and aims to halve the budget deficit in the next four years.