Introduction

The possible launch of an Asian currency unit (ACU), suggested at the beginning of the new millennium² as a means either to monitor divergence movements of the Association of South East Asian Nations (ASEAN) plus China, Korea and Japan's (ASEAN+3) individual currencies against their common regional movement or to serve as a currency of denomination of regional bonds, is now actively being discussed in different forums. There are, however, several technical aspects that need to be analyzed to identify the proper criteria for creating the ACU. Given the possible use of the ACU as a unit of account, a medium of exchange, and a store of value, a number of choices need to be made with regard to the selection of currencies to be part of the basket, the nature of the basket, the choice of weights and the criteria for their periodical revision, and others.

The European experience in establishing a European unit of account (EUA) during the “monetary snake” of the early 1970s, creating the European Monetary System (EMS) and the European Currency Unit (ECU) in 1979, and forming the European Monetary Union (EMU) with the birth of the euro as a new regional currency in 1999, provide relevant lessons for the creation of the ACU (Committee for the Study of Monetary Union 1989; European Economy 1990)³. Indeed, during those three decades, the European experience was particularly rich both in using the ECU for currency market monitoring as well as for serving as the denomination for the issuance of bonds.

In Section II of this paper, the particular features of basket currencies are discussed. We then examine in Section III, arguments for a weighting structure. Section IV turns to the study of the use of basket currencies as divergence indicators for a group of countries that share a sense of commonality. In Section V, we investigate the scope of basket currencies for financial market integration. Finally, Section VI designs a road map for development of a market-based basket currency in Asia. In Appendix 1, we examine to what extent ASEAN+3 currencies have moved together since the Asian financial crisis and Appendix 2 discusses various sources of risk in basket-denominated bond holdings.

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