The dollar's recent rebound has some currency mavens boldly predicting that the greenback could soar to 130 yen by next year. But the bulls may be overlooking a persistent pattern in trade flows that weighs down the buoyant buck: America's ballooning trade deficit with Asian countries other than Japan.
While U.S. negotiators have focused on reducing an intractable trade gap with Japan, the deficit with the other Asians--primarily China and Taiwan--has soared 50% since the mid-1980s, to $60 billion. Those countries, in turn, use the dollars they earn to pay for goods bought from Japan. That finances their trade deficit with Tokyo, which has quadrupled to $80 billion in the past decade. But when Japanese manufacturers get the greenbacks, they quickly sell them for yen. The result of this three-cornered trade tangle: "a Bermuda Triangle for the dollar," says John Praveen, a Merrill Lynch & Co. international economist.
The U.S. can't easily break out of that cycle. To protect their fledgling exporters, many Asian nations peg their currencies to the dollar--at exchange rates as low as 60% of what some economists consider fair value. They enforce those rates with strict controls on outside capital: Last year, Malaysian officials blunted a speculative effort to drive up the ringgit by limiting the amount of foreign funds banks could keep in interest-bearing accounts and barring locals from selling short-term money instruments to foreigners. Meanwhile, Asian central banks have amassed some of the world's largest war chests of dollar reserves.
The Bush Administration was able to persuade Taiwan and South Korea to revalue their currencies. But Clintonites, focused on trade talks with Japan and sour diplomatic relations with China, haven't tried to square accounts with the other Asians. For the buck, that could spell trouble for years to come.