MercoPress. South Atlantic News Agency

US dollar close to medium-term equilibrium says IMF

The Euro is overvalued, while the US dollar's decline has brought it closer to its medium-term equilibrium in a decade, according to a top official from the International Monetary Fund.

"In our view, the Euro is now overvalued relative to medium-term fundamentals, while the currencies of many current account surplus countries, including China, remain substantially undervalued, despite a small appreciation in real effective terms" said John Lipsky, IMF deputy managing director in a speech at the Brookings Institution. "Following the post-2002 decline (in the dollar's value), we assess that the US currency today is the closest to its medium-term equilibrium value in a decade" he added. Lipsky noted that the decline in the value of the dollar was helping bring down the US current account deficit, but that may be offset by record-high energy prices that were driving up surpluses in oil-exporting countries. As a result "new misalignments may be emerging and risks may be shifting" he warned. But despite the dollar's decline, the currency retained its dominant role in both international transactions and as a reserve currency. "Notwithstanding the dramatic claims by some, there is no doubt that the dollar will retain the central role, even though it may gradually share the stage with other currencies to a greater degree than at present" added Lipsky. However it is quite likely that eventually the US dollar will begin to share this role with the Euro, and that the Chinese Yuan importance could also increase as China's economy grows in size. But this would require full currency convertibility, a more open capital account and a track record of low and stable inflation. In the first quarter of 2008, the dollar made up nearly two-thirds of central bank international holdings. Emerging economies, which have amassed trillions of dollars in reserves, have an average dollar share of around 60%, roughly unchanged since 2004. Lipsky also cautioned that some emerging economies risked falling "behind the curve" in raising interest rates to tamp down inflation. He said greater fiscal restraint, and in some cases, more flexible exchange rate management, may be needed.