LONDON (AFP) – Bank of England governor Mervyn King said that Europe, the US and Asia must acknowledge their interdependency on the foreign exchange front, instead of blaming each other for large forex movements.
Speaking at the Advancing Enterprise conference ahead of the G7 meeting, King said large countries “cannot ignore their interdependency” when it comes to exchange rates.
His comments come as the pressure intensifies on Asian currencies, and mainly the Chinese yuan, to absorb a greater share of the dollar’s recent falls, which to date have been largely borne by free-floating currencies such as the pound, the euro and the Swiss franc.
King identified three main blocs in the current international monetary system — namely the dollar, the euro, and an Asian bloc of currencies that are to varying degrees fixed against the dollar.
“These blocs, of broadly comparable size, produce more than two-thirds of world output in total. Given their size, the choice of exchange rate regime of one bloc has a significant effect on the options available to the others,” he said.
Against this backdrop, he argued, it is important to expand the group of countries that discuss these issues beyond the G7 to include China and India, whose actions increasingly have global economic consequences.
For example, monetary stimulus in the US will have a different effect on the euro area if Asian countries have flexible rather than fixed rates against the dollar.
“So the choice of exchange rate regime by any one bloc both depends on and affects the choices of the others,” King added.
Over the past 15 years, Asian countries have piled up dollar denominated reserves, taking the tally to a much larger proportion than the US share of world output. Alongside this development there have been large current account deficits in the US, he said.
If this imbalance goes on indefinitely it could potentially destabilise the international monetary system, he warned.
But apportioning blame on each other is a pointless exercise, he said.
“It is easy to see how each bloc can view this possibility as the responsibility of the others. But that misses the point: the current global imbalances are the natural result of policy decisions by all three blocs. It is therefore meaningless to try to identify the culprit, and blame any one blocÂ’s woes on another,” King added.
It has now become important to assess whether the global economy does need the dollar as the main reserve currency.
“Is the dominance of the dollar in world reserves a reflection of historical factors that are less and less relevant today? Or are there fundamental reasons for the world’s central banks to continue using one main currency as a source of liquidity?” King asked.
He called on all three blocs to find “a common analysis”.
“It is clear that the aim of central banks to make monetary policy less exciting and more boring needs to be complemented by a collective effort to bring boredom to the international monetary stage,” he said.
Only when the three blocs agree on the nature of the risks in the current international monetary arrangements will there be “the possibility of a cooperative outcome that is an improvement for all, not just for some,” King said.
Source: Yahoo News