Surging dollar seen to hobble Asia growth track

MANILA, Philippines–A surging dollar may cause Asian economies to bog down this year, as investors seek higher interest rates, while borrowing costs for those with foreign obligations rise.

But British bank HSBC assured the Asian economies that they were still safe from any major economic crises. While growth may not be as fast as in the past years, chances for a total collapse were slim.

Since the start of the year, the US dollar has climbed steadily amid expectations that the Federal Reserve would hike its funds rate from record lows for the first time since the 2008 financial crisis.

Higher Fed rates means higher yields for US securities, which will make the American market more attractive to fund managers, raising demand for the dollar. In the past five years, investors chased yields in emerging economies like the Philippines.

HSBC said the dollar’s rise would hurt in two ways: First, foreign investors holding local debt would ask for higher interest rates; second, the servicing of foreign currency denominated debt would become more costly.

“That’s not exactly what Asia needs right now,” HSBC Asian Economic Research co-head Frederic Neumann said in a note to clients.

In its updated regional economic outlook, the International Monetary Fund (IMF) said emerging Asia would grow by 6.8 percent this year—a tenth of a percentage point slightly faster than a previous projection in October. Global growth, meanwhile, is seen at a much slower 3.5 percent.

Normally, Neumann said, weaker currencies would benefit Asian economies, which rely heavily on exports for economic growth. However, with the dollar rising across the board, competition has heightened.

“Profits aren’t improving as much as one might have expected,” Neumann said.

The dollar’s strength is also mostly a reflection of diverging policies with other central banks, rather than an indication of stronger growth in the United States. As a result, exports from Asian countries have not improved as much, Neumann said.

“Currency swings currently matter because of their impact on financial conditions,” he explained.

Neumann noted that countries in the region, which have ample foreign exchange reserves and improved fiscal positions, were strong enough to absorb the damage caused by the dollar.

“The strong dollar presents a growth problem. That’s it,” he said.