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Dollar flows pose risks to Asia-Pacific economies: World Bank news
19 October 2010

US policies are increasingly driving capital into emerging economies, threatening to create asset bubbles and derail economic stability in Asia-Pacific, the World Bank has warned.

US Fed's easy money policy is causing a flood of cash into higher-yielding emerging markets, undermining their export competitiveness and pumping up inflation and asset bubbles, the World Bank said in a report.

"Driven by abundant global liquidity in search of yield, combined with expectations of stronger growth in the region than abroad, capital inflows have risen sharply this year. Larger inflows have helped exchange rates appreciate substantially despite exchange market interventions by central banks. Inflows have also contributed to large increases in asset prices. Most monetary authorities have refrained from introducing capital controls so far," Vikram Nehru, World Bank chief economist for the East Asia and the Pacific region said in a report.

"Should inflows remain strong, especially against a background of weak global growth, the authorities will be faced with the challenge of balancing the need for large capital inflows - especially foreign direct investment - with ensuring competitiveness, financial sector stability, and low inflation," he said.

While economic recovery in East Asia and the Pacific has been robust, attention must now turn to managing emerging risks, which may pose challenges to macroeconomic stability, the World Bank said in its latest East Asia and Pacific Economic Update released today.  

The report noted that output has recovered to above pre-crisis levels throughout developing East Asia, and is expanding at near pre-crisis rates in some countries.

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Dollar flows pose risks to Asia-Pacific economies: World Bank