How Useful Is an Asian Currency Unit (ACU) Index for Surveillance in East Asia?

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 average or
benchmark is that there is a formation of two contrasting groups of countries in the region—one
a group of strong currencies and the other a group of weak currencies. We emphasize that the
implication of this contrasting trajectory in East Asian intra-regional exchange rates is to disturb
the competitive trading relationships in the region which may result in wasteful beggar-thyneighbor
policies in the region. As emphasized by other recent studies, e.g., Kawai and Takagi
(2012), the region needs a kind of framework for exchange rate policy coordination that will
promote intra-regional exchange rate stability. We suggest several ways in which the region can
capitalize on using this ACU index in the immediate term for surveillance purposes, particularly,
for purposes of assessing “over- and undervaluation” of the individual currencies from the
regional ACU average and for flagging emerging vulnerabilities in individual economies in the
region.