‘Key currencies’ affect patterns of global imbalances – BIS paper

Thinking about currency “zones” instead of currencies themselves can shed important light on global imbalances, according to research published by the Bank for International Settlements.

Robert McCauley and Hiro Ito divide the world into zones according to the co-movement of national currencies with a set of “key currencies”. The “dollar zone” accounts for “well over” half of global GDP.

Thinking about the world in this way changes the perspective on global imbalances, they write in the working paper. Large US current account deficits prompted many economists to predict a dollar crash in the early 2000s, McCauley and Ito say, but the current account of the dollar zone as a whole was in balance.

“Neither flow nor stock readings on the dollar zone supported widespread predictions in the early 2000s of an imminent dollar crash,” they write.

The current situation may be more problematic. According to IMF projections, the dollar zone will return to “sizeable deficits”, not seen since the mid-1980s, the authors say. The rise of the renminbi as a global currency could make the situation worse, they add.