Rise in dollar to bring Asia to 90s like situation

Speedier rise in US real rates and dollar have now pushed Asia to lift its real rates

The rise in US real rates and the dollar have pushed Asia to lift its real rates and if this trend continues it will bring Asia to a situation that would be similar to the 1990s, says a Morgan Stanley's report.

According to the global financial service major, the speedier rise in US real rates and dollar has now pushed Asia to lift its real rates at a time when its GDP growth has already been slowing. This pro-cyclical tightening, is only adding further pressure to the region's growth.

"If the rise in the US dollar were to continue for longer, this will bring Asia to a situation that would be similar to the 1990s," Morgan Stanley said.

According to Morgan Stanley, the developments in the current cycle have largely mirrored those from the mid-1990s to 2001.

"In this cycle, like that in 1995 to 2001, as US real rates moved up along with a decline in its trade deficit, the dollar appreciated forcing Asian currencies to weaken and Asian real rates to rise," it said.

The report further noted that within Asia, excluding Japan, those countries with current account deficit would face greater immediate pressure due to funding risks.

"These metrics indicate that India, Indonesia, Australia, Thailand, Hong Kong and Singapore will be most exposed," Morgan Stanley said.

The upward pressures on real rates in Asia will likely remain as a trend, as this is the beginning of the cycle of a rise in the US dollar and rates.

"As real interest rates move higher, the region will have to sharpen its focus on the productivity dynamic to lift GDP growth," the report said adding that the situation now could be more challenging than the 1990s  "because demographic trends are now weaker".

The report noted that structural reforms that boost the productivity dynamic will lift the quality of growth in the region and help ensure that it can withstand the impact of higher real rates.