Last month we covered a speech by BIS Chief Economist Claudio Borio. Mr. Borio said there was "no doubt the dominance of one currency (the US dollar) creates challenges for the IMFS" (International Monetary and Financial System). He went on to say that what he felt was needed were "stronger anchors at the national and international level." You can read his full speech here.
This week we have a new speech by BIS Economic Adviser Hyun Song Shin. In this new speech we once again see concerns about the US dollar discussed. Below I have pasted in the extract of the speech and links to some news articles covering it. You can read the full speech here. This speech has a lot of information in it so I may do a followup article on it. I recommend reading the full speech.
Extract Summary of the Speech
"A stronger US dollar is putting strains on global financial markets and the banking system, leading to tensions not only in emerging market economies, but in "safe haven" currencies such as the Japanese yen and the Swiss franc. One intriguing development has been the breakdown of covered interest parity (CIP), which ensures that interest rates implicit in currency markets are consistent with those in money markets. CIP broke down during the financial crisis, and deviations have reappeared in the last 18 months, with the size of the deviations fluctuating in step with a stronger dollar. The breakdown reflects, in part, the tensions created by the divergence of monetary policy among major central banks and the withdrawal of easy dollar credit conditions that prevailed after the financial crisis, all in the context of the dollar's special role in the global financial system. As the dollar has strengthened, investors have found it harder to roll over hedges put in place when the US currency was depreciating and investors were borrowing more in dollars to take advantage of low interest rates. BIS data show that the euro and the yen may be starting to take on the features of an international funding currency, following in the footsteps of the dollar."
Reuters article on this speech (some quotes below)
Distortions in dollar-based interest rate markets resulting from the U.S. currency's two-year rally pose a growing threat to financial stability, the Bank for International Settlements warned on Wednesday.
"Hyun Song Shin, head of research at the BIS, said a breakdown in what is known as covered interest parity and the resulting strains in cross-currency basis rates could have a negative impact across the global financial system.
The Swiss-based BIS acts as a forum for major central banks.
"In spite of the outward tranquility, there are tensions beneath the surface," Shin told a World Bank conference in Washington.
"The financial tail appears to be wagging the real economy dog. This is not how things are supposed to work. The key takeaway is that a stronger dollar is associated with more severe market anomalies," Shin said." . . . . . .
"Shin's comments on Wednesday follow similar warnings a month ago from his BIS colleague Claudio Borio that the dollar's overwhelming position of dominance in the global financial system posed risks to world financial stability."
AFR.com article on this speech (some quotes below)
"Financial markets have become the tail "wagging the real economy dog", as American monetary policy and a strong US dollar strain the global financial system, according to the Bank for International Settlements.
This sounds as if it is directed at the US Fed.