Forex

Interest rates in Asian countries pegged to the dollar are too loose and are fueling global commodity price rises, the governor of the Bank of England said Thursday.

Many Asian currencies are directly or indirectly pegged to the U.S. dollar, which also ties their monetary policy to that of the U.S. Federal Reserve.

"A very important part of the world economy has decided to peg their exchange rates to only one of the exchange rates namely the U.S. dollar," King said. "What it's doing is leading that part of the world economy to have a much more expansionary monetary policy than would be desirable. That is one of the factors that has lain behind some of the upward pressure on commodity prices in addition to issues to do with the balance between demand (and) supply."
Speaking before a committee of U.K. lawmakers, King said that "dollar levels are not appropriate for these countries, this can make life difficult."
He said these dollar pegs resulted in too loose monetary policy in many parts of the world and that low global interest rates were fueling rising commodity prices.

"The rising price of oil (is) leading to a stage in which monetary policy looks a little lax," King said.

In recent months the Fed has been aggressively cutting rates to stave off a recession which has caused the dollar to weaken dramatically against other world currencies, including the euro. The current Fed interest rate is 2% and this makes borrowing costs in dollar-pegged countries artificially low.