Currency traders were given a green light to continue selling the US dollar on Wednesday, as the International Monetary Fund said the greenback “remains overvalued” and rejected claims the euro had risen too far.
Contradicting Rodrigo Rato, the outgoing IMF managing director, who last week said “right now the dollar is undervalued”, the fund’s staff conclude the dollar is still too high. The multilateral lender also forecast slower growth in 2008 at 4.75 per cent, compared with 5.2 per cent expected this year.
The IMF’s new stance on the dollar will counter the arguments to the contrary made by France and some other eurozone members at this weekend’s meetings of the Group of Seven leading economies and the IMF’s governing body. They have been urging a change in language to temper the fall in the dollar, which dropped by more than 4 per cent against the euro in September alone.
The IMF, however, has little sympathy for struggling eurozone exporters hit by the currency’s rise. It says that even after its recent rise, the euro “continues to trade in a range broadly consistent with medium-term fundamentals”.
Apart from the dollar, the IMF’s economists also think sterling is overvalued, while the Japanese yen and the Chinese renmimbi remain too cheap compared with other currencies.
In some of its strongest language to date, the fund’s officials call on China to let its currency appreciate. Repeating its demand for “greater flexibility” of China’s managed currency, the IMF added that such action was in China’s best interests.
“Further upward flexibility of the renminbi, along with measures to reform the exchange rate regime and boost consumption, would also contribute to a necessary rebalancing of demand and to an orderly unwinding of global imbalances,” the World Economic Outlook argued.
Even with slower growth forecast for the US and a weaker dollar, the IMF sees little improvement in the world’s huge trade imbalances, embodied in the US trade deficit and corresponding surpluses in Asia and in oil exporters.
The Fund thinks that the US current account deficit will remain close to 1.5 per cent of world output until 2012, raising the likelihood of a disorderly plunge in the dollar and protectionism growing over the next few years.
