## The Dollar, the Yen and European Currencies--Address by Michel Camdessus

_IMF News, November 17, 1995_

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## Bibliographic details
- Published: November 17, 1995

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### Context and purpose
- Speech delivered at the XIV Sesiones de Trabajo de Tesoreria, Caja de Ahorros de Navarra, Pamplona, Spain, November 17, 1995.
- Purpose: examine roles of the dollar, the yen, and European currencies; assess effectiveness of exchange arrangements for exchange rate stability; explore government and IMF actions to encourage greater exchange rate stability in the face of powerful private markets.

### Roles of the major currencies
- Dollar:
  - Remains "the most international of the world's currencies."
  - Currency in which most official reserves are held.
  - Most foreign exchange transactions involve the dollar.
  - Most trade transactions are denominated in dollars.
- Yen:
  - Has some international role but is primarily a national currency.
  - Role not commensurate with Japan's economy or creditor status.
  - Limited use as an invoicing currency for Japanese trade and regionally.
  - Part of the SDR valuation basket.
- European currencies:
  - Primarily national currencies; some important regionally.
  - Deutsche mark is the most important European currency and linchpin of the ERM/EMS.
  - In some European markets (France, Spain), transaction volume in deutsche mark exceeds that in dollars.
  - Extensive use of deutsche mark in Central and Eastern Europe.
- Pegging/zones:
  - "23 countries that peg their currencies to the dollar."
  - "25 countries whose currencies are linked through the EMS (including 14 African countries that peg to the French franc)."
  - "There are no currencies pegged to the yen."

### Exchange arrangements and historical performance
- Post-Bretton Woods (since 1973):
  - Dollar, yen, and deutsche mark have operated under "managed floating"—no fixed relationship but occasional interventions and policy shifts to affect exchange rates.
  - ERM (initiated 1979): intended to reduce volatility; later focused on controlling inflation and macroeconomic convergence; became central to movement toward EMU.
- System resilience and shortcomings:
  - System since 1973 "has proven to be reasonably resilient"—handled oil crises 1973 and 1979 and accommodated cyclical differences in 1980s/1990s.
  - EMS enhanced monetary and fiscal discipline, narrowed inflation and interest differentials, helped intra-European trade.
  - Shortcomings: increased exchange rate volatility since 1973; emergence of currency misalignments that can persist and cause damage (misallocation, protectionism, trade frictions).

### Key statistics and market facts (preserved exactly)
- "Daily turnover in these markets is now over $1.2 trillion."
- During 1985-94, official holdings of international reserves averaged:
  - 54 percent denominated in dollars
  - 15 percent in deutsche mark
  - 8 percent in yen
  - 3 percent in pounds sterling
  - 2 percent in French francs
- Proportion of transactions (Bank for International Settlements survey):
  - 83 percent involving the dollar
  - 37 percent for the deutsche mark
  - 24 percent for the yen
- Invoicing of exports:
  - Nearly half of the exports of industrial countries denominated in dollars
  - About one quarter in deutsche mark
  - Only one tenth or less each in pounds sterling, French francs, and Japanese yen
- Use of yen in Japanese trade:
  - Only a third of Japanese exports denominated in yen
  - 40 percent of Japan's exports to Asia and Pacific denominated in yen
  - 20 percent of Japan's imports from Asia and Pacific denominated in yen
- Footnote observation: "since each transcaction involves two currencies, the sum of all transactions in all currencies amounts to 200 percent."

### Problems highlighted
- Exchange rate volatility:
  - "Dramatic increase in exchange rate volatility" since breakdown of Bretton Woods.
  - Exchange rates of dollar, yen, deutsche mark "much more volatile" than before 1973 and more volatile than consumer price indices or other economic measures.
- Currency misalignments:
  - When exchange rates depart from fundamentals for relatively long periods; can cause serious damage (misallocating resources, deepening adjustment problems, fueling protectionist pressures).
  - Examples: overvalued dollar in mid-1980s; misalignments within EMS causing turmoil.
- Private-market power vs official resources:
  - EMS crises of 1992-93 showed private resources often far exceed amounts monetary authorities can mobilize to defend parities.
- Overreliance on exchange regimes:
  - Placing too much reliance on regime mechanics and not enough on underlying policy fundamentals is perilous (lessons from 1992-93 ERM strains).
- Policy attention lapse:
  - Failure to maintain Louvre "reference ranges" in February 1987 attributed to reliance on pronouncements instead of policies and domestic preoccupations (US recovery, Japan financial crisis, Germany reunification).

### Lessons and policy recommendations
- Correct macroeconomic imbalances promptly:
  - "When macroeconomic imbalances do occur, they should be corrected as soon as possible" to reduce risk of market turmoil and credibility loss.
  - Exchange market intervention has a limited, temporary role as a signal; policy changes are required to convince markets of alignment with fundamentals.
- Major countries' responsibilities:
  - Prominence of dollar, yen, European currencies implies special obligations for the United States, Japan, and European countries.
  - United States: pursue monetary and fiscal policies that promote price stability and enhance domestic savings; cooperate internationally to promote exchange rate stability.
  - Japan, Germany, and other European countries: ensure economic fundamentals are sound; strengthen economic policies to contribute to global stability.
- Specific domestic reforms:
  - Fiscal consolidation: "considerably more action is needed" to reduce fiscal deficits and public debt as a share of GDP, especially given aging populations.
  - Expenditure-focused consolidation; reform major transfer programs (pension and health care systems, subsidies, indexation).
  - Japan: strengthen domestic banking system; deregulate economy; expose it to greater competition.
  - Europe: labor market reforms to reduce structural unemployment and help fiscal consolidation; create a "virtuous circle" of reforms leading to lower interest rates, investment, growth, and improved employment.
- European Monetary Union:
  - Continue and, in some countries, intensify efforts toward monetary union.
  - Fiscal consolidation should "go much further than the Maastricht criteria require."
- Multilateral coordination and leadership:
  - Countries must pursue more effective multilateral coordination: understand others' policies, listen to outside judgments, take enlightened view of national interests, and have leadership to act.
  - G-7 should resist significant depreciation of the dollar from then-present levels and ensure commitments are credible by addressing fundamental policy requirements for a stronger dollar and a more realistically valued yen.
  - IMF should maintain candid dialogue with the G-7 and encourage continuous policy coordination, not just reactive measures.

### IMF role and surveillance
- Surveillance as principal IMF contribution:
  - Regular, thorough, candid consultations with each of its 180 members, usually once a year or more often as needed, covering fiscal, monetary, exchange rate, and structural issues.
  - Aim: encourage strong and consistent economic policies to lead to exchange rate stability and sustainable growth.
- Strengthening surveillance post-Mexico:
  - Ensure more regular and timely provision of data to the Fund.
  - Intensify dialogue with country authorities.
  - Greater attention to soundness of domestic banking systems, financial flows and sustainability, countries with greater risks, and potential spillovers.
  - Developing standards to guide members in provision of economic and financial data to the public.
- Complementarity with market discipline:
  - Markets provide discipline but not always smoothly; IMF surveillance can encourage timely policy adjustments before markets force costlier corrections.

### Recent developments and outlook (as of speech)
- Encouraged by industrial countries' action "last August" to reinforce the dollar's slight recovery against the yen.
- Judgment that major currencies were "within, broadly speaking, an acceptable range," but:
  - "U.S. dollar continues to look weak against the deutsche mark and closely linked European currencies, as well as against the Japanese yen."
  - From a macro perspective, a stronger U.S. dollar and slightly weaker deutsche mark and yen "might seem appropriate" given respective cyclical conditions.
- G-7 declaration in Washington in October welcomed orderly reversal in major currency movements, reaffirmed commitment to reduce imbalances and cooperate closely in exchange markets.
- IMF should persevere in candid G-7 dialogue and encourage continuous policy coordination to detect and avert misalignments early.

*Source: The Dollar, the Yen and European Currencies—Address by Michel Camdessus, November 17, 1995, International Monetary Fund.*

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## References

- [Germany and the IMF](http://www.imf.org/external/country/DEU/index.htm)
- [Spain and the IMF](http://www.imf.org/external/country/ESP/index.htm)
- [France and the IMF](http://www.imf.org/external/country/FRA/index.htm)
- [Japan and the IMF](http://www.imf.org/external/country/JPN/index.htm)
- [United States and the IMF](http://www.imf.org/external/country/USA/index.htm)
- [IMF Policy Advice -- A Factsheet](https://www.imf.org/en/about/factsheets/imf-surveillance)
- [Speeches](https://www.imf.org/en/news/searchnews)
- [PRESS CENTER](http://presscenter.imf.org/)
- [https://www.imf.org/en/home](https://www.imf.org/en/home)

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