How useful is an Asian Currency Unit (ACU) index for surveillance in East Asia?

- There is currently a formation of two contrasting groups of countries in the region - one group of strong currencies and one group of weak currencies.
- This contrasting trajectory in East Asian intra-regional exchange rates implies disturbed competitive trading relationships in the region.
- This also raises the possibility of wasteful beggar-thy-neighbor policies in the region.
- One benefit of using an ACU index for surveillance purposes in the immediate term is to assess “over- and undervaluation” of individual currencies from the regional ACU average.
- The ACU index is also useful for monitoring the patterns of capital flows in the region.

An Asian Currency Unit (ACU) index is constructed using an alternative procedure which minimizes a basket or portfolio of assets expressed in terms of national currencies. Using this estimated ACU index and an ACU deviation indicator, the main finding of this study based on the current trajectory of East Asian currencies relative to this regional ACU benchmark is that there is a formation of two contrasting groups of countries in the region-one group of strong currencies and one group of weak currencies. We emphasize that this contrasting trajectory in East Asian intra-regional exchange rates implies disturbed competitive trading relationships in the region, which may result in wasteful beggar-thy-neighbor policies. As emphasized in other recent studies (e.g., Kawai and Takagi, 2012), the region needs a framework for exchange rate policy coordination that will promote intra-regional exchange rate stability. We suggest two important ways in which the region can capitalize on using an ACU index for surveillance purposes in the immediate term. One way is to assess “over- and undervaluation” of individual currencies from the regional ACU average. The other is to use it as a monitoring device for excessive flows of international capital within the region.