Academics call for more diversified global currency basket, less dependent on US dollar
Asian emerging markets and developing economies should deepen regional financial market integration in order to mitigate the risk resulted from the US dollar’s dominance, experts and economists have suggested.
The remarks were part of the statement released on Monday by the Asian Shadow Financial Regulatory Committee (ASFRC) at their 35th annual meeting on "What can Asian Economies do about the USD Global Financial Cycle?" hosted by NIDA Business School in Thailand and its MSc in Corporate Finance, Investment, and Risk Management (CIFRM) program.
ASFRC members are all academics in finance and economics from the Asia Pacific. The statement aimed to persuade governments throughout Asia Pacific of the significance of diversifying the global currency basket.
Such a step will make countries in the region more resilient to external factors. They referenced the current impact on countries across the world from the US Federal Reserve raising policy rates to tame its own inflation.
"Tightening of monetary policy may be appropriate for the United States, but this exerts a recessionary tendency in the world as the United States' tightening raises yields on US treasuries and induces capital outflows from other countries," the statement explained.
One of the committee members, Martin Young, a professor at Massey University in New Zealand, said that the dollar remains powerful because the United States has the largest global economy.
However, in terms of cross-border trade and investment, reliance on a single currency threatens the financial market's stability.
According to Obstfeld and Zhou's 2022 study, despite the switch to a floating exchange rate system 50 years ago, the world remains largely on the dollar standard.
The majority of trade and invoicing is done in US dollars. The US dollar is used approximately 50% of the time in global trade invoicing, and around 90% of the time in global foreign exchange transactions where one side is in US dollars.
Young emphasised that the ASFRC committee has no intention of toppling the dollar. They simply require a greater balance in the global currency basket.
He declared that the dollar's dominance in the global financial market should be reduced.
According to Maria Socorro Gochoco-Bautista of the University of the Philippines, allowing one currency to dominate the global market would inevitably have an impact on others, particularly small and open market Asian countries like Thailand and the Philippines.
Each country has its own economic cycle and development, she explained. Because countries all over the world are involved in the global supply chain and demand, the global economy may have some effects. However, the impact should not be so severe that a single government's monetary policy deprives the others of financial stability and the ability to control their economies.
Jian-Xin Wang from the University of Technology Sydney, Australia, stated that the committee’s recommendations are a long-term process for each country to collaborate together to find a better system of global financial currency which the committee dubbed as a multi-polar currency system.
According to the committee statement, a multi-polar currency system will be better because it will be less reliant on the actions of a single monetary authority and reduce the risk of negative externalities on the rest of the world.
"The dominance of US monetary policy limits the ability of authorities elsewhere to respond to external shocks more independently under the current dominant US dollar standard," the committee explained.
Besides encouraging Asean and other Asian economies to enhance and expand regional economic integration, the committee’s recommendations include:
● Establish a regional corporate bond market, such as the Asian Bond Market Initiative, with common issuance standards.
● Create an inter-dealer regional trading platform to provide liquidity in exchange for certain benefits such as preferential access to a regional repo market.
● Have a regional centralised counter-party for Asean names in credit default swaps.
● Create an Asean+3 zone of free capital mobility, including mutual recognition of funds and instruments from different jurisdictions.
● Remove withholding taxes on intraregional flows.
● Harmonise macro-prudential rules for managing external capital flows.
● Expand the Chiang Mai Initiative Multilateralisation into a regional repo market to provide additional liquidity on a daily basis rather than just during a crisis.
● Central banks could agree to accept cross-border collateral in the form of Asean+3 government and corporate bonds.
● With the help of multilateral institutions such as the Asian Development Bank, build regional financial infrastructure to facilitate regional market integration.
● Encourage the use of regional currencies through bilateral agreements.
● Increase local risk management capacity at the firm level, as part of central bank initiatives to encourage the use of fintech in transactions.
● Use digital currencies and distributed ledger technologies to make cross-border payments and settlements easier, faster and more secure.
Young expected that these suggestions would encourage Asia Pacific governments to adopt a multi-polar currency system. He believes that while the system may not be implemented in the next 10 years, Asia Pacific countries will eventually achieve the goal if they begin taking decisive actions.
Other panel members this time included Qian Sun of Fudan University in China, David K. Ding of Singapore Management University, Robin K.Chou of National Chengchi University in Taiwan, Aekkachai Nittayagasetwat of NIDA Business School, Sunti Tirapat of NIDA Business School, and Kridsda Nimmanunta of NIDA Business School in Thailand.
NIDA Business School
http://www.mba.nida.ac.th/en/detail/news-event/20230201055529
