IMF says U.S. Dollar Overvalued by 10-20%, Euro Too Low For Germany

The IMF issued its External Sector Report saying U.S. dollar was overvalued by 10 percent to 20 percent, the Euro was 10-20 percent too low for Germany’s fundamentals.

The International Monetary Fund (IMF) on Friday issued its External Sector Report. The report is their annual assessment of currencies and external surpluses and deficits of major economies.

The IMF assessed the U.S. dollar was overvalued by 10 percent to 20 percent, based on U.S. near-term economic fundamentals. The IMF viewed valuations of the euro, yen and yuan as broadly in line with fundamentals.

Points to the competitive advantage as with the Euro rather than say it’s own Deutsche Mark  the report assessed the euro’s valuation as appropriate for the eurozone as a whole, BUT the euro’s real effective exchange rate was 10-20 percent too low for Germany’s fundamentals. They conclude the Euro is broadly in line with euro zone fundamentals as a whole, ranging from undervaluation of 5% to overvaluation of 3%

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. They warned on America’s massive budget deficit.

“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. 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,” IMF Research Division Chief Luis Cubeddu told a news conference.

IMF reasoned that China’s Yuan is broadly in line with fundamentals but current account surplus still too large. The Yen is broadly in line with fundamentals due to appreciation in 2016 and the British pound valuation is 0-15% above level consistent with fundamentals and Brexit uncertainty. 

The US dollar continued its descent after the report, trading at $USDJPY 110.81, $EURUSD 1.1755, $GBPUSD 1.3133 and $AUDUSD .7994

Source: IMF, Reuters

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