Should Asia have a regional currency?

A man walks past an electronic board displaying various Asian countries' stock price index outside a brokerage in Tokyo August 21, 2015 (Photo: Reuters/Issei Kato).

Authors: Namsung Kim and Yasuto Watanabe, AMRO and Hiro Ito, Portland State University

In May 2019, Malaysian Prime Minister Mahathir Mohamad stated that East Asia should ‘adopt a common trading currency, not to be used locally but for the purpose of settling of trade’ that would be pegged to gold. His intention is to create a currency that replaces the US dollar as the region’s vehicle currency in regional trade and investment. Mahathir has a record of suggesting a common currency for the region, particularly during the aftermath of the Asian Financial Crisis of 1997–1998. But is his suggestion more feasible now than it was 20 years ago?

There is no question that the US dollar is the vehicle currency in the Asian region. This is not just because of the inertia of the region’s long-time practice in international trade — the United States has been one of the largest ultimate destinations of Asia’s goods. The region’s reliance on the US dollar is deeper than the level of its economic relations with the United States suggests. The US dollar’s dominance is also evident in the regional financial transactions conducted with international organisations such as the Bank for International Settlements and the Society for Worldwide Interbank Financial Telecommunication.

Many Asian emerging market economies (EMEs) hold an enormous amount of US dollar-denominated reserve assets as a mean of self-insurance against potential financial instability. China alone holds US$3.2 trillion in foreign reserves as of the end of 2018 (about a third of the global total). EMEs in Asia hold more than 10 per cent of the total while Japan holds another 10 per cent. A large portion of the reserves, around 60 per cent, are invested in US treasuries.

With this level of reliance on the US dollar, Asian economies are highly exposed to shocks arising from …continue reading