The International Monetary Fund believes that both the soaring euro and the slumping dollar are overvalued when examined in a broader global trade context, a top IMF official said on Tuesday.
“We do find the euro is on the strong side. But we also find the dollar is somewhat on the strong side, in part because the dollar trades very, very significant amounts with economies, whose currencies are significantly undervalued,” IMF First Deputy Managing Director John Lipsky said in an interview. “The euro zone’s trading pattern is different from that of the US, and the US is particularly heavily involved with trade, among others, with Asian economies whose currencies are significantly undervalued by our judgment,” Lipsky added. On another point, Lipsky told Reuters reporters he disagreed with the perception the European Central Bank and the Federal Reserve were working in opposite directions. “It’s much more straightforward to note that these two central banks face different circumstances,” Lipsky said.
The Fed has aggressively cut interest rates in a bid to spur US economic growth, while the ECB has held rates steady and said its main concern is keeping inflation in check. “The difficulty and the strains evident in US financial markets have been more direct than in Europe. There’s no subprime mortgage to be melting down. The presence of non-bank institutions is less important,” Lipsky said. “Similarly, the signs of economic distress are much clearer in the US than in the European economy,” he added. “The notion that somehow the ECB is looking at something very different, looking at the world in a different way from the Fed, doesn’t reflect the difference in the underlying circumstances faced by each institution,” Lipsky said.
The euro’s sharp rise is making it more difficult for European exporters to remain competitive in world markets, while the slump in the dollar over the past several years has helped push US exports to record levels. Lipsky declined to comment on whether euro had risen too high against the dollar, as many in Europe believe. “We don’t judge bilateral rates. In a global economy, we look at real effective rates. We look at currencies in a broad context,” Lipsky said. Many members of the US Congress believe the dollar is significantly overvalued against the China yuan, which remains tightly controlled by the Beijing. They have proposed legislation that would allow companies to ask for countervailing duties on individual Chinese exports to offset the perceived currency advantage. But correcting global trade imbalances is better handled by stimulating Chinese domestic demand and boosting US savings rates, than passing trade laws, Lipsky said. “To say we’re going to start retaliating ... creates real risk” to the global economy, Lipsky said.
At the same time, the IMF hopes the abrupt US economic slowdown will prompt Chinese officials to speed up their efforts to boost domestic demand, Lipsky said. “The Chinese authorities are about to unveil a whole new set of economic authorities and it will be very interesting and instructive to see the policy proposals,” he said. At the same time, the Chinese have already said boosting domestic demand “is one of the key goals of their economic policy” and have developed plans to do that, Lipsky said. “It’s, of course, worthwhile asking are they actually implementing the measures that they said they needed to do for their own interest,” Lipsky said. (Reuters)