Here's How Asia Is Preparing For A Massive Tidal Wave Of U.S. Dollars

Asia is preparing for an onslaught of fresh U.S. cash as a result of quantitative easing 2. And this wave has the potential to eclipse any capital inflow seen before, according to Societe Generale.

Capital Inflows

Photo: Societe Generale

But the big story is how long can Asian economies manage these inflows without making a mess of them. That means sterilization costs for central banks, best described as the interest rate spread between “domestic liabilities…and foreign assets (the return on FX reserves),” according to Societe Generale.

So each central bank is bearing a different amount of costs in association with this spread. The higher the bar, the more the country is spending to keep control of the system.

Sterilization Costs

Photo: Societe Generale

India and Indonesia’s central banks are those most likely in need of support from their national treasuries. But what do these costs actually mean? As they go higher, they hit GDP of each country. Thailand is getting hit the worst here.

Sterilization Costs

Photo: Societe Generale

What’s a potential solution to this problem? An increase in the value of a country’s currency, which will make investing in the economy far less appealing, according to Societe Generale.

But how is a country to raise the value of its currency and remain competitive when the Fed is flooding the world with dollars?

Here’s what emerging economies are doing to fight hot money inflows >

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