SINGAPORE, 23 October 2005 — The dollar’s renewed strength against Asian currencies is increasing the pain of high oil costs for the region, piling pressure on nations to conserve energy or roll back subsidies that have helped demand grow unchecked.
Further gains in the dollar, which hit a two-year high against the yen this week, would add to $60-a-barrel costs for non-dollar nations who have been partly protected by the greenback’s weakness during much of oil’s two-year rally.
“With a strong dollar and strong oil it’s a double whammy for Asia,” said Andy Xie, analyst at Morgan Stanley in Hong Kong. “Oil was a problem before but now it’s the worst of both worlds.”
Dollar-linked countries such as China or energy-efficient ones such as Japan, which have strong export-driven economies, may brush off the impact of a stronger dollar, analysts say.
Consumers in the region’s many countries that subsidies prices are shielded from both the energy-cost and currency impacts, but the dollar’s rally puts those governments under greater budgetary pressure to raise prices, cutting into demand.
Indonesia, where the rupiah has lost about 8 percent on the dollar this year, expects to see slower economic growth after sharp fuel price hikes this month that have cut demand for oil products by a third in Asia’s largest gasoline importer.
“A stronger dollar increases the incentive to conserve energy and should reduce oil demand, though this is a medium or long-term effect,” said Mirza Baig, currency strategist at Deutsche Bank in Singapore.
The dollar has strengthened on expectations of higher US interest rates, though analysts polled by Reuters forecast its rally may lose steam in the next year if concerns over US deficits return.
Oil has climbed on worries stretched supplies will struggle to meet burgeoning fuel demand in countries such as the United States and China. But signs that record-high prices of $70.85 are taking a toll on demand helped push crude to $62 on Thursday.
While US oil prices are up 43 percent in dollars this year, buyers paying in yen would have to stump up 60 percent more per barrel than at the start of the year, compared to 50 percent more in Thai baht or 45 percent in Korean won.
The yen has seen the sharpest fall against the dollar, down about 11 percent in the year to date, leaving Japan paying more for its oil than South Korea, where the won has slipped less than 2 percent versus the greenback.
The effect on demand in Japan, the world’s No. 3 oil user, will be muted by the benefits of a weaker currency for the export firms that are the mainstay of its economy, and by its high energy efficiency, traders said.
“In the short term I don’t think demand will be cut, but maybe long term, as alternative energy investment is very active and being promoted by high prices,” said an analyst at a bank in Tokyo.
