After five consecutive 25-basis point interest rate increases by the US Federal Reserve in the second half of 2004 the year might have been expected to end with credit spreads lower, a sell-off in emerging-market debt and a slowdown of real-estate investments.
None of that has happened. Instead for now, much of the stress in financial markets is being felt in the foreign exchange markets. What the Asian central banks do next is of most immediate concern. With their mercantilist hat still on, and led by the Japanese and Chinese central banks, they have been buying dollar assets, especially US treasuries, as a way of supporting their export markets. With little domestic demand to speak of, exports have provided much of the growth for the Asian region. With the dollar weakening over the past two...
