Blog Post

Recent exchange rate developments and the scope for G20 international collaboration

A global imbalances are beginning to widen again foreign-exchange markets have experienced increasing volatility in recent weeks with large swings in bilateral rates resulting in often large changes in effective rates. Some of these movements are consistent with an adjustment in imbalances.  In the case of the dollar, its depreciation (4.2% since 1 September in […]

By: Date: October 26, 2010 Topic: Global Economics & Governance

A global imbalances are beginning to widen again foreign-exchange markets have experienced increasing volatility in recent weeks with large swings in bilateral rates resulting in often large changes in effective rates. Some of these movements are consistent with an adjustment in imbalances.  In the case of the dollar, its depreciation (4.2% since 1 September in nominal effective terms) contributes to the rebalancing of US production from internal to external demand and alleviates deflationary risks in the United States. Similarly, the moderate appreciation that has occurred in emerging market economies such as Brazil and India (1.1% since 1 September in nominal effective terms in both countries) should help them to contain inflationary pressures but may exacerbate their current account deficit unless it is compensated by fiscal tightening.

On the other hand, some other exchange-rate movements go in the opposite direction. The substantial appreciation of the euro (4.1% in nominal effective terms since 1 September) will reinforce deflationary risks. In Japan, yen appreciation would exacerbate deflation but would help to reduce the current account surplus. In China, the renminbi, which has remained tightly linked to the dollar, has depreciated substantially in effective terms (2.3% per cent since 1 September), which works against the rebalancing of the economy toward domestic demand. Furthermore, by adding to general economic uncertainty, increased volatility in foreign exchange markets is bound to dampen growth.

In current conditions the appreciation of emerging-market currencies is a normal and welcome adjustment to the fact that emerging economies enjoy a better economic outlook than most OECD countries. The downside for emerging-market economies is that, if the exchange rate moves by a large amount,  it may lead to an uneven distribution of the adjustment burden with the exposed sectors doing most of the adjustment and domestic sectors (and asset markets) being allowed to expand strongly.  If the exchange rate movement is seen as a short-lived overshooting, this could be an argument for temporary intervention to smooth the adjustment, but there is always a risk that this argument may justify intervention in cases where it does not really apply.

The fact that the largest emerging-market economy is intervening massively to keep its currency from increasing is value considerably increases appreciation forces in other emerging-market economies. This situation creates a risk of prompting series of interventions which would further increase the pressure on countries that have not followed suit. This reminds us that, in general, foreign exchange intervention is not the most helpful instrument for macro-economic management. It can prompt countervailing intervention abroad and ultimately poses a risk of triggering protectionist responses. A much more desirable approach to rebalancing would count on a number of policy measures coordinated among major countries and regions. For example the policy scenario presented in the OECD Economic Outlook No. 87 incorporated substantial exchange-rate realignments but also other measures. Most OECD currencies were assumed to fall by 10% immediately and by a further 1% per annum over the next ten years. The dollar was assumed to depreciate more, by a further 10%. In addition to the general assumed appreciation of non-OECD currencies, the policy scenario also included a 20% rise in the external value of the renminbi over two years. Together with fiscal consolidation and structural reform, these exchange rate changes helped to generate domestic demand-driven growth in external surplus countries and growth driven in part by foreign demand in deficit countries. Similar results have been reached in the simulations supporting the work carried out by the IMF (with inputs from the OECD) to identify an upside scenario within the G20 Framework for Strong, Sustainable, and Balanced Growth.  Needless to say to achieve these results a strong commitment to continuing collaboration among the G20 is needed    From this point of view recent events in currency markets are a source of concern also because they signal the intention by a number of countries to pursue short term unilateral moves to address mounting imbalances and, implicitly, a disillusionment to pursue coordinated medium term actions. The conclusions of the G20 ministerial meeting in Gyengju (and hopefully the conclusion of the Seoul summit) have sent a more reassuring message as they indicate the will of the G20 countries to address the issue of imbalances, which may represent a serious obstacle to stable and sustained growth, although the practical implementation still needs to be worked out.. The Mutual Assessment Process based on the Framework for Growth will provide the institutional underpinning for the agreement of a coordinated solution that, hopefully, will address market concerns about the evolution of global governance.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.


Warning: Invalid argument supplied for foreach() in /home/bruegelo/public_html/wp-content/themes/bruegel/content.php on line 449
View comments
Read about event More on this topic

Upcoming Event

Jan
22
08:00

Rules-based trading system and EU-Australia

At this event the Australian Minister for Trade, Tourism and Investment, Senator the Hon Simon Birmingham will speak about Australia-EU bilateral trade, the FTA negotiations and the importance of multilateral rules-based trading system

Speakers: Senator the Hon Simon Birmingham, André Sapir and Guntram B. Wolff Topic: Global Economics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read article More on this topic More by this author

Opinion

Elections, institutions and statecraft: A tumultuous year for Modi in India

With the turn of the year, India has firmly entered election mode. Recent regional elections have begun to shift the political landscape, while tensions continue to simmer between the Reserve Bank of India and the Ministry of Finance. How the Modi government sees out this term could set important precedents for the incoming government in May 2019.

By: Suman Bery Topic: Global Economics & Governance Date: January 16, 2019
Read about event More on this topic

Upcoming Event

Feb
8
08:30

The world’s response to China’s Belt and Road Initiative

This event will look at the Chinese Belt and Road Initiative as well as the response from the rest of the world.

Speakers: Alicia García-Herrero, Jean-Francois Di Meglio, Theresa Fallon and Uri Dadush Topic: Global Economics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read article More by this author

Blog Post

What 2019 could bring: A look inside the crystal ball

Economic performance prospects in Europe, the US and Asia in 2019. We start off by reviewing commentaries and predictions about the euro zone, which many commentators expect to perform below potential as uncertainties continue to dampen a still robust recovery.

By: Michael Baltensperger Topic: European Macroeconomics & Governance, Global Economics & Governance Date: January 14, 2019
Read article Download PDF More on this topic

Policy Contribution

The Belt and Road turns five

Five years after its launch, Michael Baltensperger and Uri Dadush reflect on China’s Belt and Road Initiative. The plan to revive ancient trade routes has the potential to enhance development prospects across the world and in China, but that potential might not be realised because the BRI’s objectives are too broad and ill-defined, and its execution is too often non-transparent, lacking in due diligence and uncoordinated.

By: Michael Baltensperger and Uri Dadush Topic: Global Economics & Governance Date: January 10, 2019
Read article More on this topic More by this author

Opinion

Lose-lose scenario for Europe from ongoing China-US negotiations

Without an expectation of a larger market for European exports in the absence of additional opening up by Chinese authorities, European exporters should not enjoy the ongoing China-US negotiations.

By: Alicia García-Herrero Topic: Global Economics & Governance Date: January 9, 2019
Read article More on this topic More by this author

Blog Post

The microeconomics of Christmas

It’s that time of the year, again. Silvia Merler reviews major contributions to the literature on the controversial topic of the deadweight loss of Christmas.

By: Silvia Merler Topic: Global Economics & Governance Date: December 24, 2018
Read article More by this author

Podcast

Podcast

Director’s cut: Wrapping up 2018

With 2018 drawing to a close, and the dawn of 2019 imminent, Bruegel's scholars reflect on the economic policy developments we can expect in the new year – one that brings with it the additional uncertainty of European elections.

By: The Sound of Economics Topic: Energy & Climate, European Macroeconomics & Governance, Finance & Financial Regulation, Global Economics & Governance, Innovation & Competition Policy Date: December 20, 2018
Read article More on this topic More by this author

Opinion

China’s view of the trade war has changed—and so has its strategy

The truce agreed on by China and the United States at the sidelines of the recent G-20 meeting in Buenos Aires doesn’t really change the picture of the U.S.’s ultimate goal of containing China. The reason is straightforward: The U.S. and China have become strategic competitors and will continue to be so for the foreseeable future, which leaves little room for any long-term settlement of disputes.

By: Alicia García-Herrero Topic: Global Economics & Governance Date: December 19, 2018
Read article More on this topic More by this author

Opinion

Immigration: The doors of perception

Surveys show that people systematically overestimate the share of foreign-born citizens among resident populations. Aligning people's perceptions with reality is vital to the betterment of public debate and proposed policies.

By: Inês Goncalves Raposo Topic: Global Economics & Governance Date: December 12, 2018
Read article More by this author

Opinion

The UN climate conference in Katowice: A message from the European capital of coal

Following the COP24 climate talks in Poland, Simone Tagliapietra reviews the arguments for and challenges to decarbonisation.

By: Simone Tagliapietra Topic: Energy & Climate, Global Economics & Governance Date: December 12, 2018
Read article More by this author

Blog Post

Economic policy challenges in Southern and Eastern Mediterranean

For a long time, southern and eastern Mediterranean countries struggled with serious socio-economic challenges and dysfunctional economic systems and policies. Marek Dabrowski reviews the challenges the region has to face to get out of a low growth trap.

By: Marek Dabrowski Topic: Global Economics & Governance Date: December 11, 2018
Load more posts