Exchange Rates

The size of global imbalances has decreased somewhat with the US current account deficit falling from a peak of 6.5 per cent of GDP in 2006 to 5.5 per cent in 2007, and to 4.9 per cent in 2008. In part, the improvement reflects the heightened competitiveness of US exports vis-à-vis the Euro zone and Japan as the dollar weakened between 2002 and 2004, and, after stabilising during 2005, weakened further in 2006 and 2007.

Thus, in January 2008, one EUR purchased 55 per cent more USD than in January 2001. However, in the course of 2008 (especially at the end of the year with the spread of the crisis to the Euro zone and Japan) the USD strengthened against the EUR and nearly all other currencies, reflecting its status as a reserve currency and the attractiveness of the highly liquid market for US Treasury bonds during times of uncertainty.

Even if the fundamentals driving the current account suggest a substantial depreciation of the USD, its predominance as an international reserve currency limits the chances for a substantial fall of the USD vis-á-vis other major currencies (e.g. EUR, GBP or JPY) in the near future. The unwinding of global imbalances in late 2008 has also affected “carry trade” currencies such as the Japanese Yen (JPY) which have depreciated substantially against the dollar since late 2008. The counterparts to the sizeable current account deficit of the United States continue to be principally in East Asia and in oil-exporting economies.

Surpluses in these areas are projected to fall over the next two years. Exchange-rate adjustments have so far been orderly and expectations are that this situation will continue. In the present circumstances, however, any boost to global demand is highly welcomed, and concerns about global imbalances are not likely to rise to the top of the policy agenda until recovery in the global economy is firmly underway.