The roller-coaster ride for Asian currencies, which saw only the yen and yuan post significant gains for the year against the U.S. dollar, is set to continue in 2012, Reuters reported.
While Japan actively sought to stem the yen's rise -- drawing U.S. criticism last week -- China intervened to ensure the yuan ended the year at a new high. Both currencies appreciated roughly 5 percent in 2011 against the dollar.
The opposite approaches illustrate a dilemma facing Asian policymakers as they try to smooth out foreign exchange rate volatility, which shows no sign of abating in the new year. If the currency is too strong, exports get more expensive. Too weak, and imported inflation spikes and domestic buying power fades.
Singapore and South Korea provide two examples of how inflation can stay surprisingly high, even as declining global demand curbs exports and saps growth. Both the Singapore dollar and the won slipped against the greenback in 2011.
For Japan, which has been battling deflationary forces for two decades, rising prices would be a welcome change. Three times in 2011, Tokyo intervened in the currency market to try to weaken the yen, once with the help of Group of 7 nations after the March earthquake and tsunami, and twice unilaterally.
It was the solo moves that drew Washington's ire. The Treasury pointed out in its December 27 report to Congress on world currencies that the United States "did not support these interventions," and said Japan would be better served by taking steps to increase the dynamism of its domestic economy.
"The United States is saying, our recovery is dependent on the (U.S.) dollar not becoming too strong," said Yukon Huang, an economist with the Washington-based Carnegie Endowment for International Peace.
"It's worried that there will be a global move for people to depreciate" their currencies, he said.
The twice-yearly currency report was mandated by Congress in 1988, when the trade imbalance with Japan was the main concern. More recently, it has become a source of friction with China.
Even the critique of Japan in the latest report may have been intended as a message for Beijing.
"The criticism (of Japan) is accurate but it's 20 years old and resuscitated as cover," said Derek Scissors, a research fellow at the conservative Heritage Foundation in Washington.
"It's so they don't appear to be picking on China."
If Treasury determines a country is manipulating its currency to gain a trade advantage, it can call in the International Monetary Fund to press for a realignment.
Some U.S. lawmakers, businesses and unions want Washington to label China a manipulator, but Treasury declined to do so yet again in its latest report. It did, however, mention China twice as many times as it referred to Japan.
While there may be politics at play in the currency report, a closer look at trading in China's yuan suggests Beijing may have earned its reprieve this time. Read more.
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