Bruegel Says Worldwide Exchange Rates Adjustment Would Fight Current Account Deficits

The March 2007 Bruegel Policy Brief reveals that imbalances in global current account positions are not sustainable and need adjustment. A 15% depreciation of the dollar and an appreciation of Asian currencies is needed in order to:

• reduce the US current account deficit,
• faciliate China’s focus on domestic demand and reduce its accumulation of foreign exchange reserves, and
• return the Japanese exchange rate to a more neutral stance.
  Leaving the adjustment to financial markets involves the risk of a global downturn and the build-up of protectionism. Policymakers should agree on a multilateral policy-induced adjustment to minimize the risks of these outcomes.