Today the ECB chose to raise the Eurozone interest rate which effectively should not come as a big surprise for anyone following the European discourse and debate as of late. However, behind this move by the European Central Bank lies a more subtle narrative concerning the global macroeconomic imbalances and how some believe that while the US is slowing and the dollar falling the ECB will continue to raise rates on the back of a sustainable recovery in the Eurozone. As such, we are seing the beginning of the unwinding of the imbalances. This at least was how many argued a week ago, among those the influential British magazine The Economist (of which I am third year happy subscriber I should add) who in their cover story and following in-depth article hailed a new era in the global economy where the dollar and the US economy corrected to the fundamentals of a huge US current account deficit and the fact that Eurozone would take over pulling growth forward. In short, what we are seeing is a prolonged and sustained fall in the dollar. Also the notable economics commentator Martin Wolf from the FT noted that the current fall in the dollar would be sustained to correct the imbalances.
In the following I will argue that we are not on the brink of global re-balancing. My argument is initially based on the simple yet crucial notion that the extent to which the Dollar can fall hinges on whether other currencies can appreciate. I will present the theoretical components for re-balancing as two steps and show why this most likely will remain to be theory and not practice. My essay will end on an open note inviting to a discussion about the fundamental drivers of global macroeconomic imbalances.