An Investigation of the Effect of Asian Purchases of U.S. Treasuries on Asian Bilateral Exchange Rates.

Abstract

Faced with declining domestic savings, the U.S. has been borrowing from abroad to finance its current account deficits. This paper examines the role of Asian purchases of U.S. treasuries in the fluctuations of selected Asian/US dollar bilateral exchange rates. In particular, it looks at the dynamic implications of a shock of Asian purchases of U.S. treasuries on their bilateral currency rates using a vector autoregressive (VAR) framework. The variance decomposition results indicate that Asian purchases of U.S. treasuries played little or no role in explaining the variations of their bilateral exchange rates during the entire period of the study, although their contribution became more prominent during the sub-period of the study which covers the post-Asian financial crisis and pre- U.S. financial turmoil. The Chinese yuan became more sensitive to variations in other Asian purchases and U.S. economic conditions, while the influence of Chinese purchases on the exchange rate fluctuations of both the Japanese yen and the Singaporean dollar increased along with those of the Japanese purchases. The impulse response functions generally indicate an immediate impact of the shocks in Asian purchases on the exchange rates, and the responses tend to be generally permanent in nature. [ABSTRACT FROM AUTHOR]