|OECD warns rebalancing of US deficit may drive dollar
05/23/06 "Forbes" -- -- 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,
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
And, a case can be made that a correction of the US
current account deficit, once it occurs, could be
'orderly and gradual',it added.
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
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