Asian Development Bank Annual Meeting - Are you ready for an Asian “Euro"?

May 13, 2006

The Asian Development Bank President, Haruhiko Kuroda, said that at the May 5 meeting that Asian countries should work toward closer coordination of their foreign exchange policies. He urged them to defend regional currencies against speculators and work toward the development of Asian bond markets. Most importantly, he reiterated the Bank's desire that they develop a unified currency, along the lines of the Euro, which they call the ACU.

What it Means:
An ACU would greatly reduce risk among the currencies in Asia, thereby reducing portfolio risk. One of the greatest sources of volatility in emerging markets is the unknown, and therefore risky, amount of currency trading that occurs among speculators. A single currency would eliminate much of this risk. In Europe the introduction of a single currency simplified travel and trade, therefore increasing economic growth.

It is rumored that the U.S. opposes such a single currency - although publicly they have no position. They are afraid, and rightly so, that an ACU would provide a safe haven for Japan and China, who currently support the U.S. current account deficit through their vast holdings of U.S. Treasuries. An ACU could lead to a declining dollar, and thus a lower standard of living in the U.S.

Even if the ACU never gets off the ground, the fact that these countries are working together to identify strategies to reduce risk in their currencies will help reduce volatility in emerging markets.

Action Steps:
Do you have any emerging market bond funds in your portfolio? These have generally been considered highly risky, thanks to defaults by Argentina and other Latin American nations in the ‘90’s.

However, a well-diversified bond fund provides a good hedge against emerging market, high growth stock funds. That’s because when stock funds decline, bonds funds increase in value.The Asian countries’ efforts to unify their currency policies will help to lessen risk even more for bond funds.

Source: Asian Development Bank