One of these days, the U.S. dollar could take a severe monetary caning at the hands of the Singaporean central bank. Or Bank Negara, the Malaysian monetary authority known at times for predatory forays into the $1 trillion-a-day global foreign exchange market. Even cautious Taiwan's central bank could take a whack at the buck.
Last week, the dollar was still reeling from its latest sharp falls, against the Japanese yen in particular. It dropped to a post-World War II low of 80 yen to the dollar before bouncing.
Ten years ago, the mighty Reagan dollar fetched 263 yen, three times its value today. Five years ago it was worth 150 yen, 90 percent higher. Nonetheless, even tougher times could lie ahead for the dollar, if the Southeast Asian economic powerhouses decide that their continued allegiance to the U.S. dollar is costing too much.
That economic and monetary bond is embodied by the !c proportion of central bank reserves -- a nation's hard-currency strongbox -- held in U.S. dollars as opposed to yen, German marks, Swiss francs, Australian dollars or other globally convertible currencies. These reserves back up local currencies such as the Singapore dollar or the Malaysian ringgit and help smooth out inflows and outflows from trade and investment.
For years, the developed countries have been trimming their holdings of dollars as the yen and deutsche mark emerged as stronger competitors to the U.S. unit. The end of the Cold War has speeded this up, as the elimination of the Soviet threat undermined the dollar's traditional appeal as a safe haven for capitalists. Much the same thing happened to the British pound after World War II: This former global reserve currency collapsed with the British empire and economy. Now it's the dollar's turn -- though its decline dates back at least to the early 1970s, when the gold standard was abandoned.
In 1983, the dollar accounted for about 78 percent of the reserves held by central banks around the world, or roughly $280 billion, according to the Bank for International Settlements in Basel, Switzerland, known as the "bank for central bankers." But by the end of 1993, the dollar's share had dropped to 60 percent, though of a much larger pie of $941 billion. Until recently, this process of reserve diversification was less pronounced in newly industrialized countries -- today's emerging markets. Now it could kick into gear there with a vengeance as East Asian central bankers move to lighten their stocks of dollars.
"The fact is, they are diversifying," says Steven H. Hanke, a professor of applied economics at the Johns Hopkins University as well as a monetary consultant to several Latin and East European countries. "They've got their fingers royally burned by holding so much in dollar reserves. It's a little bit like the Japanese investors who have taken a bath over the past decade buying dollar-priced investments."
"Dollar demand is going to be declining," adds Tom Tull, a Dallas-based global money manager whose Gulfstream Global Investors is involved in the major developed and developing markets around the world. "The dollar is going to continue to be a weak currency worldwide."
He sees growing pressure on Singapore, Malaysia, Indonesia, Taiwan, Thailand, the Philippines and others to become much less dollar-centered. Serious money is at stake. A recent Swiss Bank Corp. report on the phenomenon shows Taiwan's foreign reserves at $90 billion, Singaporean reserves at $54 billion and Hong Kong reserves at $40 billion.
Roughly three-quarters of Singapore's reserves are in dollars, estimates Jeff Frankel, a University of California at Berkeley economic professor and fellow at Washington's Institute for International Economics.
Assuming this is the case for all non-Japanese central banks, about $230 billion in Asian central bank greenback holdings could be in play. Swiss Bank Corp. economists attempted to calculate the impact of a move away from the U.S. dollar by Asian central banks, finding that some very "interesting" and "disturbing" trends may emerge.
Trade on the Pacific Rim since 1980 has been steadily shifting away from the United States toward Japan and within Southeast Asia itself, reducing the importance of the U.S. dollar as the medium of commerce. This is all the more important because the Asian economies have the fastest rate of growth in their currency reserves of any world region, meaning that shifts there will have an inordinate effect.
Even if the dollar's share of global central bank reserves falls only by another 10 percent between now and the year 2000, central bankers will dump anywhere from $340 billion to $865 billion, the Swiss Bank study concluded.
XTC The process is already under way, judging from the report this week that the Taiwanese central bank confirmed it had trimmed the dollar's share of its reserves to 54 percent after the greenback's latest plunge, from 57 percent in 1994 and 58 percent in 1993.
That came amid many unconfirmed reports of other East Asian central banks dumping the dollar even as the Bank of Japan was furiously buying billions in greenbacks in a largely vain effort to stem the U.S. currency's precipitous losses. Not everyone sees a wholesale Asian defection to the Japanese yen.
Mr. Frankel acknowledges the heavy pressures on central banks to mitigate erosion in the value of their dollars, particularly as much East Asian debt is denominated in yen, making repayment ever more expensive. But "most of those nations don't want to be in a yen bloc," he says. Adds Mr. Hanke, "They will take the dollar down, but it is still the vehicle that [financial and other] trades take place in. As a store of value, clearly, the dollar is inferior to the deutsche mark and the yen. As a medium of exchange, it is superior."
Also skeptical is Scott Pardee, chairman of Yamaichi International, the New York investment bank branch of a major Japanese city bank.
He concedes that Asian central banks "are hedging [foreign exchange risk] more actively than they have in the past" by selling dollars for yen through futures contracts or forward currency agreements. But Mr. Pardee sees these more as tactical and defensive moves by the central banks than as "permanent repositioning" away from the U.S. dollar.
Mr. Pardee, a former Federal Reserve official, argued that the dollar's decline could be swiftly reversed once the mercurial psychology of the international currency markets has shifted away from the yen.
One day, "it will turn and it will turn with a vengeance," he says, though this depends on improvement in the U.S. trade deficit with Japan. For the moment, though, the tide is running against the dollar, and central bank selling is likely to reinforce the long-term trend. This process could be repeated on a smaller scale if ordinary people worldwide lose their faith in the greenback and start preferring yen and mark bills. Though the dollar amounts involved are much smaller -- one highly conservative estimate by a Harvard economist in the early 1980s put it at $20 billion, though it's probably closer to $100 billion now -- the physical dollars in circulation outside U.S. borders also benefit the U.S. government.
Every crumpled and faded dollar bill under a foreign mattress amounts to an interest-free loan to the U.S. Treasury -- the principle is known to numismatists and economists as seigniorage. Should East Europeans, Middle Easterners and Southeast Asians ever send a tide of greenbacks back to Washington for conversion into marks, yen, pounds, francs or ringgit, says Mr. Frankel, "that might be something we wouldn't like."
Mr. Hanke doesn't see that happening any time soon, though.
"I don't see that as I travel around. The dollar is what they want. There are pockets where other currencies dominate -- in the former Yugoslavia they want the deutsche mark. But everywhere else it's the dollar."
Brendan Murphy, a former United Press International foreign correspondent, is a free-lance financial writer based in New York.