LegiStorm

Summary:

According to the International Monetary Fund (IMF), monetary authorities in East Asia (including Southeast Asia) have adopted a variety of foreign exchange rate policies, varying from Hong Kong’s currency board system which links the Hong Kong dollar to the U.S. dollar, to the “independently floating” exchange rates of Japan, the Philippines, and South Korea. Most Asian monetary authorities have adopted “managed floats” that allow their currency to fluctuate within a limited range over time as part of a larger economic policy. Regardless of their exchange rate policies, monetary authorities on occasion may intervene in foreign exchange (forex) markets in an effort to dampen destabilizing fluctuations in the value of their currencies. Legislation has been introduced during past Congresses designed to pressure nations seen as “currency manipulators” to allow their currencies to appreciate against the U.S. dollar. The Trade Facilitation and Trade Enforcement Act of 2015 (P.L. 114-125) requires the Secretary of the Treasury to provide Congress every 180 days with “enhanced analysis of macroeconomic and exchange rate policies” for each major trading partner that has a significant trade surplus with the United States, a current account surplus, and “engaged in persistent one-sided intervention in the foreign exchange market.” In its latest report, Treasury determined that “no major trading partner met all three criteria for the current reporting period.” Treasury did place six major trading partners—China, Germany, Japan, South Korea, Switzerland, and Taiwan—on its “Monitoring List.” Four of those six major trading partners are in East Asia. In the 115th Congress, the Currency Reform for Fair Trade Act (H.R. 2039) would allow the imposition of countervailing duties on goods imported from a foreign country whose currency is determined to be “fundamentally undervalued” in accordance with the provisions of the act. Most East Asian monetary authorities consider a “managed float” exchange rate policy conducive to their economic goals and objectives. A “managed float” can reduce exchange rate risks, which can stimulate international trade, foster domestic economic growth, and lower inflationary pressures. It can also lead to serious macroeconomic imbalances if the currency is, or becomes, severely overvalued or undervalued. A managed float usually means that the nation has to impose restrictions on the flow of financial capital or lose some autonomy in its monetary policy. Over the last 10 years, the governments of East Asia have differed in their response to the fluctuations in the value of the U.S. dollar. China, for example, allowed its currency, the renminbi, gradually to appreciate against the U.S. dollar between 2007 and 2015, and has been actively intervening in foreign exchange (forex) markets since then to prevent the depreciation of its currency. Indonesia, however, has allowed its currency, the rupiah, to depreciate in value relative to the U.S. dollar over the last decade. Between 2011 and 2013, some Southeast Asia nations—such as Malaysia, the Philippines, Singapore, and Thailand—appeared to have adopted exchange rates regimes to keep their currencies relatively stable with respect to China’s renminbi. This supposed “renminbi bloc” may have emerged because those nations’ economic and trade ties were increasingly with China. In addition, China was actively promoting the use of its currency for trade settlements, particularly in Asia. Exchange rate patterns for the last four years, however, have led some analysts to suggest the “renminbi bloc,” may have weakened. This report will be updated as events warrant.