10-19-2004, 04:47 AM
http://www.iimcal.ac.in/community/FinClub/...sp?which=art143
<b>The Road Ahead </b>
Certainly any country facing current account deficit of 5-6% of GDP would have invited currency crises. But , well US is different case. It can finance its CA deficit by printing its own currency. Put it this way ---
If US is running deficit, some other country would be running surplus. Let say, India is running surplus with US. This inflow of extra dollars into India might drive rupee up. So RBI in order to check rupee gain would purchase dollars from the market and park them in US T-Bills earning 1.25% on them. Thus, effectively US is able to finance its CA deficit, simply by printing more dollars.
<b>But things have changed since 9/11, interest rates are at historic lows, corporate scandals, stock market fall, etc. have shattered investorsâ confidence. Investors are looking at other investment avenues. This has made increasingly difficult for US to finance its CA deficit. Experts believe that all major developing countries have increased proportion of Euro in their reserve holdings. Thus, what we have seen so far is gradual correction of dollar. But analyst says that dollar will have to fall by around 30% to bring CA deficit to sustainable level. Neither Euro nor Yen are in position to bear such large appreciation. Thus, appropriate dollar depreciation will be frustrated, if the Asian economies do not do their part on currency appreciation. China has weight of nearly 10% in dollar trade weighted index. Chinese Yuan, thus will have to play major role in dollar correction</b>.
<b>The Road Ahead </b>
Certainly any country facing current account deficit of 5-6% of GDP would have invited currency crises. But , well US is different case. It can finance its CA deficit by printing its own currency. Put it this way ---
If US is running deficit, some other country would be running surplus. Let say, India is running surplus with US. This inflow of extra dollars into India might drive rupee up. So RBI in order to check rupee gain would purchase dollars from the market and park them in US T-Bills earning 1.25% on them. Thus, effectively US is able to finance its CA deficit, simply by printing more dollars.
<b>But things have changed since 9/11, interest rates are at historic lows, corporate scandals, stock market fall, etc. have shattered investorsâ confidence. Investors are looking at other investment avenues. This has made increasingly difficult for US to finance its CA deficit. Experts believe that all major developing countries have increased proportion of Euro in their reserve holdings. Thus, what we have seen so far is gradual correction of dollar. But analyst says that dollar will have to fall by around 30% to bring CA deficit to sustainable level. Neither Euro nor Yen are in position to bear such large appreciation. Thus, appropriate dollar depreciation will be frustrated, if the Asian economies do not do their part on currency appreciation. China has weight of nearly 10% in dollar trade weighted index. Chinese Yuan, thus will have to play major role in dollar correction</b>.