It’s not yen, euro or koala bloc: greenback is still dominant in East Asia

Abstract

Given the nature of East Asia’s economic structure, interregional exchange rate stability is an essential requirement for regional economic integration. One way to achieve exchange rate stability is for the region to adopt an anchor currency. However, the choice of a potential anchor is an important question for policy planners. This paper examines the role of 5 major currencies as candidates for an anchor currency in the East Asian region. In particular, the paper examines the dynamic linkages between a selected sample of East Asian currencies with each potential anchor currency, the Australian dollar, Japanese yen, euro, US dollar and Chinese renminbi. Utilizing a recently developed test procedure which distinguishes the long-run Granger non-causality from that in the short-run, this paper does not find any support to the much debated emergence of a yen bloc, euro bloc, or koala bloc. The empirical evidence brought forward in this paper suggests that the US dollar is still a dominant currency in the East Asian region.