By Ng Yew Kwang

THE current financial crisis is spectacular, but has also exhibited certain anomalies in the way it has unfolded.

The crisis originated in the sub-prime housing-loan sector in the United States and was also related to over-spending by US consumers. In contrast, in many Asian countries, especially Singapore and China, saving rates have been phenomenally high and huge international surpluses have been accumulated. Also, the problems of bad loans and bubbles, if any, are much milder than in the US. Both financial and economic fundamentals are sound, especially for Singapore.

True, in the current globalised world problems in the US will affect other countries. Exports to the US may fall substantially. However, with the continuing growth of China, India and other Asian countries, the importance of the US market has been declining.

In terms of fundamentals, when the financial crisis started in the US funds should have fled the US and gone to the prudent Asian countries with high savings and reserves. But in recent weeks we have seen the reverse. This is supposed to be due to the safe haven status of the US dollar. While the greenback deserved such a status in the past, this should no longer be the case after the current crisis, which was caused essentially by US imprudence.

Sooner or later, people should realise that the US dollar should no longer be regarded as a safe haven. Instead, they should go for alternatives like gold and currencies, and assets of prudent countries.

There have been other anomalies. First, in this crisis we would have expected huge falls in the US share markets but relatively smaller falls in Asia. However, share prices have fallen more in many prudent Asian countries.

Fear factor

This cannot be justified on the basis of economic fundamentals. It is more the result of a fear psychology. The excess declines have been particularly unwarranted for countries like Australia and Singapore which have strong economies and do not share the American problems.

Secondly, while we should have expected the US dollar to fall, it actually appreciated substantially against most currencies in the past few weeks. The depreciation of the Australian dollar against the US dollar has been particularly spectacular. At its peak, the Aussie dollar was worth about 98.5 (US) cents in mid-July. It is now worth about 68 cents.

The collapse of the Aussie dollar was probably due to the reversal of the carry trade. This refers to trades by arbitrageurs borrowing in countries such as Japan with very low interest rates and lending to countries such as Australia with higher interest rates. In times of crisis, people panic or run out of liquidity and close their carry trade position, leading to a reversal of fund movements.

However, the reversal of the carry trade is likely to be short-term only. I come from Australia and know the Australian economy well. I am confident that it is fundamentally strong and will remain so. The Aussie dollar should therefore recover soon.

I also expect that investors who have the nerve and the money to stand short-term irrational knee-jerk reactions are likely to win in the medium and long run.

The author is visiting professor, Division of Economics, Nanyang Technological University. He is visiting from Monash University in Melbourne.

This article was first published in The Business Times on October 23, 2008.