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The Tell: Strong dollar could spark repeat of 1990s ‘Asian Crisis’ if it crosses this threshold, former Goldman economist warns


Jim O’Neill, the former Goldman Sachs economist most famous for coining the term “BRICs,” told Bloomberg NewsThursday that the U.S. dollar could spark a new Asian financial crisis if the Japanese yen sinks to 150 against the greenback — a level last seen in 1990.

Recently, there’s been a lot of speculation about how far the dollar could strengthen as the Federal Reserve continues to raise interest rates at an aggressive pace, making the greenback more attractive to foreign investors.

This week, the the yen USDJPY fell to 134 against the greenback, for the first time since 2002.

To be sure, other central banks are scrambling to keep pace with the Fed — most recently, the European Central Bank on Thursday left the door open to a 50 basis point rate hike in September, and the Reserve Bank of Australia surprised economists with a larger-than-expected hike earlier this week.

But while many central banks are following in the Fed’s footsteps, the Bank of Japan has opted to keep its monetary policy loose to help finance Japanese Prime Minister Fumio Kishida’s spending ambitions.

Last month, Eisuke Sakakibara, a former Japanese government official often referred to by his nickname, “Mr. Yen,” said that the Japanese currency could weaken to 150 yen to the dollar
according to a separate Bloomberg News report.

But if the yen keeps weakening, China could step in to further devalue its currency, the yuan, potentially sparking a chain reaction of currency weakness across the region that could bear echoes of the late 1990s Asian Financial Crisis, which started in Thailand with the crash of the Thai baht, before ricocheting across the region — then across the world.

“If the yen keeps weakening, China will see this as unfair competitive advantage so the parallels to the Asian Financial Crisis are perfectly obviously,” said O’Neill to Bloomberg. “China would not want this devaluing of currencies to threaten their economy.”

Assuming the Bank of Japan sticks with yield curve control — its policy of carefully stage-managing the yields of Japanese government bonds seen by economists to be an ultra-loose form of monetary policy — the dollar’s strength could create “serious problems” in Beijing,O’Neill said.

The economist and former chair of Goldman Sachs Asset Management left the investment bank in 2013, before later becoming a senior advisor at Chatham House, British policy institute. “BRICs” is an acronym that stands for “Brazil, Russia, India China,” and is meant to represent a group of the most influential emerging-market economies.

A number of Wall Street strategists recently called for a pause in the dollar’s torrid rally, which has brought it to multi-decade highs against many of its main rivals. Nevertheless, the greenback has continued to strengthen against the yen.

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