The great Asia currency revolution
Asian governments have been fighting a rearguard action to hold down their currencies. They have stopped external surpluses from fuelling domestic inflation. But they are at their limits.
The dollar's recent slide seems to have been triggered by the news that China had decided to raise its interest rates. That set the markets speculating that the Chinese renminbi would be detached from its peg to the dollar. And if the renminbi appreciated against the dollar, other Asian currencies would follow suit.
Markets are right in one way. The dollar will resume the secular decline that began in early 2002. After seven fat years of dollar appreciation, along with strong US GDP growth in the hi-tech revolution of the late 1990s, we are now in seven lean years of dollar decline, and slower productivity and GDP growth.
Where markets are wrong is to suggest that the renminbi will be the main driver of the dollar's demise rather than just part of it. Asian currencies are set to appreciate in value significantly over the next few years anyway because of structural improvement in the operation of domestic economies and reduced dependence on foreign capital.
The Chinese are switching from administrative measures to market interest rates for macroeconomic management.