Dollar at risk as inflation deters Asian intervention SINGAPORE: The US dollar may be heading for a big fall, with analysts saying that rising inflation will force Asian central banks to cut the currency intervention that has been financing the massive US current account deficit. “The price to pay for the type of intervention we saw last year...is typically that you get inflationary pressure,” said Jan Lambregts, Rabobank’s head of Asia-Pacific research. “Last year that price did not have to be paid, but this time around, in an environment where inflationary pressure is on the rise, such intervention could really throw fuel on the fire.” Last week’s record US current account deficit of $144.9 billion for the first quarter was a reminder to markets fixated on next week’s US Federal Reserve meeting that the United States still has a funding problem. In 2003 the United States ran a current account deficit of $530.6 billion — broadly, the imbalance between its exports and imports and the income it received from or paid to foreigners. Asian central banks were happy to finance that deficit by buying US dollar assets, such as Treasury bonds, to hold down their currencies and keep their exports competitive. In 2003, they increased their foreign exchange reserves by almost $520 billion. That intervention occured when deflation was a worry for much of Asia, which was also struggling with the impact of the war in Iraq and the SARS outbreak. Now deflation has gone in most Asian countries, where prices are not only rising but accelerating. On Wednesday, China said inflation was moving to near five percent, a rate seen as a possible trigger for a rate rise, while Singapore reported its highest inflation rate since December 2000. Allowing a currency to strengthen is one way to slow an economy and hold down inflation. Intervening to hold a currency down, on the other hand, tends to pump up the amount of money in the economy, stoking inflation.
