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P R O S P E C T S

3-month and 10-year bond yield Percent 6 10-year U.S. yield 5 4 10-year euro yield

2 3-month euro yield 1 3-month U.S. yield 0 Jan. 2003

July 2003

Jan. 2004

July 2004

Jan. 2005

July 2005

Jan. 2006

T H E

G L O B A L

E C O N O M Y

surpluses (China and several oil exporters) have resisted upward pressure on their currencies with respect to the dollar. The depreciation against the euro occurred despite a substantial premium currently being offered on both short- and long-term U.S. bonds (see figure 1.11). With U.S. monetary policy nearing or at the end of its tightening cycle, these differences are expected to narrow. In the baseline forecast, this narrowing and slower growth in the United States are projected to cause the dollar to depreciate by a further 5 percent against the euro in each of 2007 and 2008, which should further facilitate the unwinding of global imbalances. However, should downward pressures be more severe, the depreciation could be stronger or interest rates in the U.S. may have to rise further (see the section on risks). Currency developments for the remaining developing countries were dominated by the reemergence of financial market volatility in the first half of 2006 (figure 1.12). Downward pressure on the dollar toward the end of 2005 and at the beginning of 2006 saw the currencies

Figure 1.11 Interest rate spreads support the dollar

3

F O R

July 2006

Sources: World Bank; Datastream.

against the yen and depreciating by about 5 percent against the euro. In real-effective terms it has lost only 2 percent of its value. In part, this relative strength is explained because many of those countries running large current-account

Figure 1.12 Turbulence resulted in sharp depreciations for some developing countries Index of euro exchange rates Index Jan. 1, 2006 ⍽ 100 85 Brazil Indonesia

95

105 United States 115

Colombia Depreciation

125 Turkey South Africa

135

145 Jan. 2006

Feb. 2006

March 2006

April 2006

May 2006

June 2006

July 2006

Aug. 2006

Sept. 2006

Oct. 2006

Nov. 2006

Source: World Bank.

17

Global Economic Prospects 2007  

Managing the Next Wave of Globalization

Global Economic Prospects 2007  

Managing the Next Wave of Globalization

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