The dollar appears to be in the midst of a significant downward adjustment in its exchange value against other major currencies. While the dollar has been losing value against the euro and the Japanese yen, Asian central banks give no indication that they wish to scale back their huge holdings of dollar reserves. The dollar over the past year has declined over 20 percent against the euro and by a lesser amount against the yen. Many economists applaud the dollar's decline, saying it helps correct the potentially destabilizing and record high U.S. trade [or current account] deficit. A weaker dollar makes U.S. exports cheaper and thus should give them a boost on world markets. Conversely, imports from countries with appreciating currencies cost more in the United States.
David Hale, an international economist in Chicago, points out that Asian central banks are the largest holders of dollars. "The East Asian countries collectively now have 70 percent of the world's foreign exchange reserves, compared to 30 percent 10 years ago," he said. "That's $1.7 trillion. And they keep 80 to 90 percent of these assets in dollars. And the good news for the American dollar and for the Bush administration is that these Asian central banks don't plan to change this policy in the short-term."
Mr. Hale says the Asian central banks choose to hold dollars because they want to promote monetary stability and recognize their dependence on the U.S. export market.
For Kenneth Rogoff, an economist at Harvard University, the Asian central banks are more interested in stability than making a profit. "I think we're at a peculiar moment in history where major players in the market central banks and especially the central banks in Asia which are not really return oriented in their demand for dollars," he said.
Mr. Hale, speaking at a monetary forum in Washington last month, said the Asian central banks use some of their dollar reserves to purchase their own currencies and thus prevent their rapid appreciation against the dollar. They are also major purchasers of U.S. treasury securities.
"Over the last year the Asian countries have collectively spent $300 billion buying U.S. government debt," he said. "And the conclusions from my meetings [with those banks] is that they are prepared to duplicate that in 2004."
In addition to having a large trade deficit, the United States also is headed for a record budget or fiscal deficit. The U.S. Treasury sells securities to finance the budget deficit.
Other analysts say that the huge official dollar holdings in Asia represent a potential threat to the U.S. currency. The Asian central banks, they say, could gradually move out of dollars and into other reserves, notably the appreciating euro. U.S. central bank officials and leading economists minimize that threat, saying that a stable dollar is in the interest of the Asian countries which are continuing to run up large trade surpluses with the United States.