OECD warns rebalancing of US deficit may drive dollar down
-- -- LONDON (AFX) - The OECD has warned that
the eventual rebalancing of the US current account gap 'looks
increasingly unavoidable' and will send shock waves across the
globe, starting with a slump in the dollar's exchange rate.
The OECD said in its world economic outlook that the
depreciation faced by the dollar could be 'of the order of
one-third to one-half.'
The adjustment in the deficit would 'need to induce a sharp
slowdown in US domestic demand and that this would have adverse
spill-over effects on other economies both through the trade and
asset revaluation channels,' it said.
The rebalancing may be accompanied by an increase in risk
premiums and a reversal of private capital flows, it added.
Countries with current account surpluses have been accumulating
dollar reserves and 'their willingness to hold dollar assets on
their balance sheets may diminish,' the OECD warned.
It also cautioned that a protectionist response from the US may
accelerate the dollar's falls.
'The US deficit is becoming a pretext for protectionist
pressures. If this were to prompt surplus countries to reduce
their official US dollar reserves or raise expectations thereof,
support for the US dollar could wane.'
Already, the widening of current account imbalances has been
sustained far longer and with much smaller exchange rate
responses than would have been judged plausible even a decade
ago, it said.
So far the United States has attracted the capital needed to
finance its current account deficit with relative ease. But it
has also moved from being a major international creditor to a
net external liability position amounting to slightly over 20
pct of GDP, and the current US external deficit is approximately
twice the level that would be consistent with a stable net
foreign liability position.
To facilitate the inevitable adjustment in the current account
that the US is likely to face, the OECD advocates changes in the
US tax system to shore up the domestic savings rate.
'Removing some well-known anti-savings biases in the tax code.
Decisions to maintain the tax cuts and to reduce the incidence
-- such as the income tax-deductibility of mortgage interest
payments -- and moving more generally towards a consumption tax
would be particularly helpful,' said.
However, the OECD said that it is not immediately obvious what
would trigger a rebalancing and when it would occur.
And, a case can be made that a correction of the US current
account deficit, once it occurs, could be 'orderly and
Firstly, as the bulk of US international financial liabilities
are denominated in dollars, their burden to the US economy does
not rise with a depreciation in the currency. At the same time,
US external assets are largely denominated in foreign currency,
which means that they benefit from positive valuation
adjustments if the dollar depreciates.
Additionally, the central banks which have piled on dollar
reserves may prove to be reluctant sellers.
And, the US currency does not appear to be overvalued in
purchasing power parity terms. Its position as an international
reserve currency as well as the attractiveness of the
comparatively liquid US asset markets also make it less
vulnerable to confidence crises.
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