IMF says dollar overvalued while China’s yuan and Japanese yen in line with fundamentals

The International Monetary Fund on Friday said that the US dollar was overvalued by 10 to 20 per cent, based on US 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 and Britain, 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 per cent too low for Germany’s fundamentals, given its high current account surplus.

Britain’s pound, meanwhile, was assessed as up to 15 per cent overvalued compared to fundamentals, which include a high level of uncertainty over Britain’s post-Brexit trading relationship with the European Union.

The Fund said the dollar’s appreciation in recent years was based on its relatively stronger growth outlook, interest rate hikes versus looser monetary policy in the eurozone and Japan, as well as expectations for fiscal stimulus from President Donald Trump’s administration.

But so far this year, the dollar index, the broad measure of its value against other major currencies, is down more than 8 per cent this year and is off to the worst start to a year since 2002.

The IMF recommended that US 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.