RDP 2006-09: Limiting Foreign Exchange Exposure through Hedging: The Australian Experience Appendix A: Foreign Currency Exposure of the United States

The US is the pre-eminent example of a developed net debtor country that is able to gain access to foreign capital without having to assume unwanted foreign currency exposure. As is the case for Australia, an important feature of the US external position is that a considerable proportion of gross foreign liabilities are denominated in its local currency, while the majority of foreign assets are held in foreign currencies. That is, that part of the external position affected by exchange rate fluctuations is in fact a net asset position.

A.1 Gross Foreign Assets and Liabilities

US foreign equity assets are assumed to be entirely denominated in foreign currencies, while foreign equity liabilities are denominated in US dollars.^[25] The currency composition of foreign debt assets and liabilities can be derived from the benchmark Treasury surveys on ‘US Portfolio Holdings of Foreign Securities’, and ‘Foreign Portfolio Holdings of US Securities’.^[26]

Table A1 shows that while overall net foreign liabilities amounted to US$2.5 trillion as at the end of 2004, gross foreign currency-denominated assets were US$6.4 trillion (55 per cent of GDP), exceeding gross foreign currency-denominated liabilities of just US$0.6 trillion (5 per cent of GDP). The economy as a whole therefore had a large positive net foreign currency asset position of around US$5.8 trillion (50 per cent of GDP). Hence, like several other developed net debtor countries, residents of the US would enjoy a transfer of wealth from abroad resulting in the event of an exchange rate depreciation.

Allowing for a 10 per cent depreciation in the US dollar, foreign currency-denominated assets would rise by US$714 billion (from US$6,430 billion to US$7,144 billion), while foreign currency-denominated liabilities would rise by only US$68 billion (from US$612 billion to US$680 billion). Net foreign liabilities therefore would decline by around US$646 billion (or 5½ per cent of GDP) as a result of a 10 per cent depreciation in the US dollar.

While there is no information available for the US on the notional value of derivatives outstanding to augment this analysis further, we expect that hedging is far less important for the US than Australia, given the currency composition of the external accounts discussed above.

Footnotes

Some qualifications surround this assumption. Firstly, some offshore portfolio and direct equity holdings by US residents are in countries such as Ecuador and the British Virgin Islands that have adopted a hard fix to the US dollar through dollarisation, and are therefore not denominated in foreign currency. However, the sum of US equity claims on these countries amounts to less than 1 per cent of the total. Secondly, there may be some doubt about the effective currency denomination of US direct and portfolio equity claims through special purpose vehicles and hedge funds in the Caribbean banking centres (that is, Cayman Islands, Bahamas, Bermuda and Netherlands Antilles). In total, the claims amounted to around US$541 billion in 2004. While this is a non-trivial absolute value, it represents less than 10 per cent of foreign equity assets and has correspondingly little impact for the results presented here. Given the difficulties associated with making accurate estimates of these two considerations, and given their relatively small overall impact, we retain the working assumption that the entire stock of US claims on foreign equity assets is denominated in foreign currency terms. Further exceptions on the liabilities side may pertain to dual-listed company structures. [25]

In this section we follow the approach taken by Gourinchas and Rey (2005). [26]