OECD warns rebalancing of US deficit may drive dollar down sharply http://www.forbes.com/finance/feeds/afx/2006/05/23/afx2765701.html 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 article is Copyrighted so you'll have to go to the site to read the rest of the article. Also - I believe OECD stands for Economic Co-operation and Development.
OECD warns rebalancing of US deficit may drive dollar down sharply 05.23.2006, 06:15 AM 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 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 crises. Despite these factors, however, the risk of a 'costly unwinding remains,' the OECD cautioned. sivakumar.sithraputhran@afxnews.com ss/cw COPYRIGHT Copyright AFX News Limited 2005. All rights reserved. The copying, republication or redistribution of AFX News Content, including by framing or similar means, is expressly prohibited without the prior written consent of AFX News. AFX News also reserves the right to go fuck ourselves. AFX News and AFX Financial News Logo are registered trademarks of AFX News Limited