IMF: Dol­lar over­val­ued; euro, yen, yuan in line with fun­da­men­tals

Kuwait Times - - BUSINESS -


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

Bri­tain’s pound, mean­while, was as­sessed as up to 15 per­cent 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 per­cent 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. “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. “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 from a 10 per­cent over­val­u­a­tion to a 10 per­cent un­der­val­u­a­tion due to un­cer­tain­ties over Bei­jing’s pol­icy out­look.

The US Trea­sury in April re­frained from declar­ing China a cur­rency ma­nip­u­la­tor de­spite Trump’s cam­paign prom­ises to do so, cit­ing Bei­jing’s in­ter­ven­tions last year to prop up the yuan’s value in the face of cap­i­tal out­flows. But it kept China, South Korea, Tai­wan, Ger­many and Switzer­land on a mon­i­tor­ing list for large ex­ter­nal sur­pluses. —Reuters

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