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BAKU – A cut in the U.S.’s sovereign ratings may weaken the dollar and make Asian goods more expensive, hurting the region’s trade outlook, the Asian Development Bank said on Thursday, Bloomberg reported.

A depreciating dollar would also lead to financial losses for Asian nations who hold U.S. Treasuries, Iwan J. Azis, head of the ADB’s Office of Regional Economic Integration, told reporters in Beijing today.

Standard & Poor’s, Moody’s Investors Service and Fitch Ratings have said they may cut the U.S.’s top-level sovereign ranking if officials fail to resolve a stalemate over raising the $14.3 trillion debt ceiling and reducing spending. Asia still relies on U.S. and European demand for its goods, even as Group of 20 members push to rebalance the world economy so that Asia depends more on domestic consumption.

"If the U.S. sovereign rating is cut to AA, it will increase the borrowing costs and put pressure on the dollar and it is likely to depreciate further, which will definitely cause financial losses for emerging Asian nations including China for their holdings of Treasury bills," Azis said.

S&P, which rates the U.S. AAA, said July 14 that the chance of a downgrade is 50 percent in the next three months and it may cut the rating as soon as August if there isn’t a "credible" plan to reduce the nation’s deficit.

Inflation pressures
Asian policy makers need to tackle rising inflationary pressures in their economies even as global growth weakens, the ADB also said.

The region can use monetary and fiscal policies as well as exchange rates to ease price pressure, the Manila-based lender said in its Asia Economic Monitor report today. Asian economies also face the risk of increased financial market volatility and destabilizing capital flows, the ADB said.

Asia’s central banks have enacted the steepest increases in borrowing costs as the region led the global recovery from the 2009 recession, with China, India, Thailand and Taiwan raising rates in recent weeks. Still, Europe’s debt crisis and rising U.S. joblessness have threatened demand for exports and wiped more than $2 trillion off stocks worldwide since the beginning of May.

"With robust growth moderating only slightly, many emerging East Asian economies face the challenge of controlling inflation and managing capital inflows in a difficult external environment," the ADB said. "Inflationary pressures are rising in the region on strong domestic demand and high commodity prices, fueled by continuing capital inflows."

Growth forecast
The lender’s forecast for growth of 7.9 percent this year in emerging East Asian economies may be revised lower, according to the report today, which was prepared by the ADB’s Office of Regional Economic Integration. The economic forecasts remain unchanged from its April predictions for now.

Inflation in many Asian economies has risen above 10-year averages, and have either breached or approached the upper end of official targets, possibly because policy makers delayed removing monetary stimulus as their economies recovered from the global slump, the ADB said.

"With the region’s economies recovering strongly in 2010 and continuing robust growth in 2011, output gaps have narrowed significantly or closed in many economies, thus contributing to rising inflation," the lender said. "Elevated food and commodity prices and robust domestic demand could push inflation higher yet."

Stocks rise
Growth in Asia has outpaced the rest of the world, attracting foreign funds and helping boost currencies and stock markets in the past year. All of Asia’s 11 most-traded currencies except the Hong Kong dollar, which is pegged to its U.S. counterpart, have risen in the past 12 months. The MSCI Asia-Pacific Index of regional stocks excluding Japan climbed more than 18 percent.

"Authorities could adopt a strategy allowing currencies to appreciate somewhat faster, while keeping tabs on interest-rate hikes to avoid excessive ‘search-for-yield’ capital inflows," the ADB said. "This strategy would support domestic demand while dampening inflationary pressures and help global rebalancing. It would also add a lever to help manage capital flows and their domestic economic impact."

In China, where gross domestic product surged 9.6 percent in the first half from a year earlier, the ADB said the growth performance suggests that measures taken to tighten monetary policy have yet to impact the economy.

Inflation has breached the government’s 4 percent ceiling every month this year and the People’s Bank of China has raised lending rates five times since mid-October.

"Authorities are expected to keep tightening monetary policy and rolling back fiscal stimulus to counter rising inflation and economic overheating," the ADB said. "But the weak external environment and tighter monetary stance is expected to help growth moderate to more sustainable levels in the months ahead."

China’s manufacturing may contract this month for the first time in a year, according to preliminary purchasing managers’ data released by HSBC Holdings Plc. released July 21.

Asia accounted for 35 percent of world exports in 2009, compared with 25 percent a decade earlier, according to the International Monetary Fund.