The International Monetary Fund said that the U.S. dollar was overvalued by 10 percent to 20 percent, based on U.S. near-term economic fundamentals, while it viewed valuations of the euro, Japan's yen, and China's yuan as broadly in line with fundamentals.
The International Monetary Fund on Friday said that the U.S. dollar was overvalued by 10 percent to 20 percent, based on U.S. near-term economic fundamentals, while it viewed valuations of the euro, Japan’s yen, and China’s yuan as broadly in line with fundamentals. The IMF’s External Sector Report – an annual assessment of currencies and external surpluses and deficits of major economies – showed that external current account deficits were becoming more concentrated in certain advanced economies such as the United States, while surpluses remained persistent in China and Germany. While the report assessed the euro’s valuation as appropriate for the eurozone as a whole, it said the euro’s real effective exchange rate was 10-20 percent too low for Germany’s fundamentals. The IMF said the dollar’s appreciation in recent years was based on its relatively stronger growth outlook, its monetary policy divergence from the eurozone and Japan as well as expectations for further fiscal stimulus from the Trump administration.
It recommended that U.S. authorities take steps to shrink a current account deficit that remains too large, by reducing its federal budget deficit and passing structural reforms to increase the savings rate and improve the economy’s productivity. “It’s important to address imbalances, because if they’re not dealt with appropriately and through the right policies, we could have a backlash in the form of protectionism,” IMF Research Division Chief Luis Cubeddu told a news conference. Cubeddu said that the persistence of current account surpluses in export countries such as China and the growth of deficits in debtor countries such as the United States suggested that the problem would not clear up automatically.
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“That is, prices, savings and investment decisions don’t seem to be adjusting fast enough to correct imbalances. This partly reflects rigid currency arrangements, but also certain structural features, like inadequate safety nets, barriers to investment, which leads to undesirable levels of savings and investment,” he said. The report said that while China’s yuan was broadly in line with its fundamentals, IMF models showed wide divergences with desired policies, both positive and negative. It said China’s current account surplus was growing again after declining in 2015 and 2016 and needed to be reduced.