The New Global Balance

Abstract

We present a unified framework in order to help understand how the current crisis would reshape the global financial balance. We believe that as risk appetite slowly returns, the negative risk premium that benefited US Treasuries and the dollar will rapidly reverse. As the Fed is likely to err on the side of growth for a long time, the dollar could test its 2008 lows within the next 12 months. Despite an expected fall in global imbalances, we believe a more stringent financial landscape and scarcer global savings justify a weak dollar in the medium term.

Keywords: global imbalances, financial crises, exchange rates

JEL Classification: E44, F02, G15