It wasn't what Asia, or indeed Hong Kong, wanted to hear. When Ben Bernanke, chairman of the US Federal Reserve, faced the media last week, he suggested that America's central bank will stay its course. Interest rates will thus remain at record lows until the US economy shows more convincing signs of a lasting turnaround.
That may take some time. Data just released shows that the US economy slowed again sharply in the first quarter, with high oil prices in particular hurting consumers.
That's a problem for Asia. With the Federal Reserve likely to hold fire until well into 2012, the US dollar looks set to weaken further. Already, the US dollar has touched a multi-year low against America's most important trade partners. This pushes up the price of commodities and thus fans inflationary pressures across the region. In addition, global investors, attracted by strong growth and strengthening exchange rates, are pouring capital into Asia. The risk of asset bubbles is all too clear.
But, it's not all inevitable. Asian policymakers have their defences. The trick is to use these swiftly and convincingly. But, even then, no one size fits all; different countries require different weapons. To stem the dollar tide, policymakers need to choose their battle strategy wisely. Only a combination of responses, tailored to local circumstances, will work. The onslaught of cheap money, after all, will be with us for quite a while longer.
Textbooks always have easy answers. Raising interest rates is one. The trouble is that this only works with more flexible exchange rates. And these need to come first. In recent weeks, currencies have indeed started to move more convincingly, including the yuan.
But much more will need to follow to offset the powers of the Fed. Elsewhere, too, a combination of exchange rate appreciation and higher interest rates will prove effective.
The question, then, is what happens in Hong Kong: with its iron link to the US dollar, it is arguably Asia's most exposed economy to the vicissitudes of the US Federal Reserve.
