A key currency view of global imbalances

BIS Working Papers  |  No 762  | 
20 December 2018



This working paper contributes to a growing body of work that breaks free of the "triple coincidence" often assumed in international finance. A currency's domain does not coincide with the borders of the jurisdiction that issues it. Instead, key currencies enjoy global use. A key currency perspective can change how global imbalances look to economists, policymakers and market participants.


We take a step forward in the analysis of key currencies in international finance. Researchers have sorted currencies into groups around key currencies, principally the dollar and the euro. We investigate the macroeconomic consequences of such groupings. In particular, we measure the current accounts and international investment positions of key currency zones. International investment and borrowing shows a zone bias.


Economies whose currencies vary less against the dollar than against any other key currency - the dollar zone - make up over half of the global economy. Over time, the geographical reach of the similarly defined euro (or, earlier, the Deutsche mark) zone has substantially extended beyond northwestern Europe. Yet the global share of the dollar zone has remained remarkably stable. Faster growth in hitherto dollar-centred Asia outside Japan resolves this seeming paradox.

The current account balance of the dollar zone has followed a very different path from that of the United States over the last 20 years. In particular, it approached balance in the run-up to the Great Financial Crisis of 2007-09. The wide US current account deficit had led many economists to warn of an impending dollar crisis. An idea of the dollar zone's current account would have made the dollar's sharp appreciation in 2008 less surprising.



This study divides the world into currency zones according to the co-movement of each currency with the key currencies. The dollar zone groups economies that produce well over half of global GDP. The euro zone now includes almost all of Europe and some commodity producers, but remains less than half the size of the dollar zone. The dollar zone share has shown striking stability despite big shifts across zones over time. These include the demise of the sterling zone and the expansion of the DM/euro from northwestern Europe to Europe and beyond.

Global imbalances differ from a currency perspective. In the 2000s, the dollar zone's current account disappeared by the onset of the Global Financial Crisis (GFC), even as the US current account plumbed all-time lows. The dollar zone's net international investment position also reached balance then. Thus, neither flow nor stock readings on the dollar zone supported widespread predictions in the early 2000s of an imminent dollar crash. In fact, most of the long-term widening of current accounts occurred within currency zones, where by construction currency risk is limited.

Our account of the dollar's dominance rests not on the US economy's size but rather on the size of the dollar zone. In such a world, the rise of another large economy poses the question not of relative size but rather of re-alignment of third currencies. What if the renminbi becomes a key currency alongside the dollar and the euro? Already some emerging market currencies are co-moving with the renminbi against the dollar. On current evidence, a renminbi zone would shrink the dollar zone, and widen its current account deficit.

JEL classification: F31, F32, F33, F41

Keywords: global imbalances, current accounts, currency zones, international investment positions