IMF backs Trump’s claim of `overvalued’ dollar, amidst trade tensions

18 Jul 2019

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US President Donald trump is getting support from the International Monetary Fund (IMF) to bring down the value of the dollar even as he called on the Federal Reserve to match the “currency manipulation game” that China and Europe are playing.

Earlier this month, Trump tweeted that Europe and China are playing a “big currency manipulation game” and called for US policies to “MATCH, or continue being the dummies.” 
He also said that the dollar’s strength could blunt economic growth. 
However, for the currency move to succeed, the Fed must agree with the policy and clearly communicate its support, according to people familiar with the matter. 
In fact, the Treasury Department and Fed have coordinated the last three US currency interventions, splitting the amount transacted evenly between them in 1998, 2000 and 2011 in order to nudge the dollar’s value, although without any success. 
The IMF, which has been at odds with US President Donald Trump over his use of tariffs to resolve trade imbalances, however, said it is an overvalued dollar that is hurting US trade, giving credence to Trump’s complaints that dollar strength is hampering US exports.
According to the IMF, the US dollar is overvalued by 6 per cent to 12 per cent, based on near-term economic fundamentals, while the euro, Japan's yen and China's yuan were seen as broadly in line with fundamentals.
Trump has been blaming European and Chinese policies that lead to what he calls devaluation of the euro and other currencies against the dollar.
The IMF’s External Sector Report, which is an annual assessment of currencies and external surpluses and deficits of major economies, showed that current account surpluses remained centred in the euro area and other advanced economies such as Singapore, while deficits remained persistent in the United States, Britain and some emerging market economies.
The report said net creditor positions had increased again, and were now at a historical peak of about 20 per cent of global gross domestic product, or about four times the level seen in the early 1990s. Net debtor positions were at a similar level.
The IMF said recent trade policy actions were weighing on global trade flows, eroding confidence, and disrupting investment, while lamenting the fact that nations have done nothing to reverse external imbalances thus far.
The Fund, which has warned that the US-China trade war could cost the global economy about $455 billion next year, said instead of tit-for-tat tariffs, surplus and deficit countries should work to revive liberalisation efforts and strengthen the rules-based multilateral trading system that has been in effect for the past 75 years, the IMF said.
It said while reserve currencies bore the short-term financing risks of debtor positions, the risks remained for the global economy as well.
"An intensification of trade tensions or a disorderly Brexit outcome - with further repercussions for global growth and risk aversion - could .... affect other economies that are highly dependent on foreign demand and external financing," it said.
Over the medium term, trade tensions could become entrenched and further divergence of external stock positions could trigger "costly disruptive adjustments in key debtor economies that could spill over to the rest of the world."
It said countries with deficits, like the United States and Britain, should pare back spending in a growth-friendly manner, while those with big surpluses, like Germany, the Netherlands and Korea, should boost public infrastructure investment and discourage excessive saving.
The report said the euro's real effective exchange rate was 8 per cent to 18 per cent too low for Germany's fundamentals, given its high current account surplus.
The report said that while China's yuan was broadly in line with its fundamentals, IMF models showed wide divergences with desired policies from an 11.5 per cent undervaluation to an 8.5 per cent percent overvaluation due to uncertainties over Beijing's policy outlook.

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