Declining dollar could sap Asian recovery

"Markets are starting to realize that we've come very far in a very short time. We're still in the weak-dollar mode at least for the next three months."

Philip Wee, currency strategist at DBS Bank in Singapore

First it was the war in Iraq. Then came the deadly SARS virus. Now slumping Asian economies face a slow recovery as a weaker dollar hurts overseas sales of everything from Indonesian-made blue jeans to South Korean cars.

Malaysia said on Wednesday that its economy grew at the slowest pace in a year in the first quarter. South Korea's shrank for the first time in two years. A drop in exports ended a nine-month expansion in Japan.

From Seoul to Kuala Lumpur, governments are cutting interest rates and boosting spending on expectations that the US, which bought Asian goods worth US$400 billion last year, won't pull the region out of its slump.

The US economy grew at a 1.9 percent pace in the first quarter, the US Commerce Department said on Thursday, compared with the 1.6 percent reported last month. While growth may take off in the second half of the year, the dollar's drop means that demand for Asian goods won't keep pace.

"A weaker dollar and a stronger won don't bode well for us, especially when we're aiming to expand our exports to North America," said Kim Jong-do, a director at GM Daewoo Auto & Technology Co, South Korea's third-biggest automaker, which is preparing to introduce its Lacetti and Kalos sedans to the US.

Earlier this month US Secretary of the Treasury John Snow said the dollar's 21 percent slide against the euro last year had been "fairly modest." That was taken as a signal by traders that the US had abandoned its "strong dollar" policy, sending it lower against the euro and other currencies.

Asian growth will "definitely be affected by the weaker dollar," said Ng Kheng Siang, who helps manage the equivalent of US$1.1 billion at ABN Amro Asset Management Singapore Ltd. "It will upset the Asian economic recovery story."

"Markets are starting to realize that we've come very far in a very short time," said Philip Wee, a currency strategist at DBS Bank in Singapore.

"We're still in the weak-dollar mode at least for the next three months," he said.

The dollar has declined 3.5 percent against the yen in the past six months and 4.9 percent in the past 12 months. The South Korean won has gained 1.1 percent against the dollar in the past month. The Thai baht has risen 1.4 percent and the Indonesian rupiah is up 4.6 percent.

The dollar's slide adds to other woes. A drought in the Philippines caused a 0.5 percent contraction in the first quarter, the government said yesterday. North Korea's nuclear arms program is hurting consumer and business confidence in South Korea. China, which will benefit from a weaker dollar because its yuan is linked to the US currency, will be hurt by SARS.

The disease may cut growth in Asia's second-largest economy by a quarter to 6 percent this year, according to Goldman Sachs Group Inc and Peking University researchers. That will reduce demand for Samsung Electronics Co cellphones and Sony's video-game consoles.

The buildup to the US-led attack on Iraq on March 20 shook consumer and business confidence in the world's biggest economy, curbing growth and hurting demand for Asian exports.

Hong Kong's shipments to the US, which account for almost a third of the city's domestic exports, fell 5 percent from a year earlier. Hong Kong's economy probably grew 3.8 percent in the first quarter from a year earlier, slowing from a gain of 5 percent in the previous quarter, according to the median forecast in a Bloomberg News survey of 12 economists.

In South Korea, exports to the US grew 3 percent in the period, slowing from growth of 19 percent in the previous three months. The US buys a fifth of South Korean shipments, which account for 40 percent of its economy.

US growth will probably accelerate to 3.6 percent in the second half of the year, according to the National Association for Business Economics. A weaker dollar may wipe out the benefits Asia might expect from faster growth.

By the end of this year, the dollar may be 11 percent lower against a basket of other currencies, Barclays Capital Inc estimates. That would knock 5.5 percent off US import growth this year.

The US isn't likely to grow at the 5.7 percent pace needed to overcome the effect of the dollar's decline, "making it quite likely that US import growth will slow this year,"Henry Willmore, chief US economist at Barclays Capital, wrote in a May 8 report.

Asian companies count on a rising dollar to increase demand for their products and boost the value of sales when they are converted back into local currencies.