IMF says USD OVERVALUED

A

aeliodon

IMF said today that USD was still very overvalued. And not only that, they think its overvalued by 15%-35%.
So what's your currency hedge strategy?



http://in.reuters.com/article/businessNews/idINIndia-30006620071015?pageNumber=2&sp=true

By Lesley Wroughton

WASHINGTON (Reuters) - International Monetary Fund Managing Director Rodrigo Rato on Monday said the U.S. dollar was still overvalued, despite trading near a record low, and needed to depreciate further.

"As the IMF looks to a medium-term stability of currencies, we still see that the dollar is overvalued," Rato told a group of reporters.

"We still see room for further depreciation and if you look at future(s) markets, you will see that markets are more or less seeing the same."

Rato, speaking ahead of the fall meetings of the IMF and World Bank, said the euro was very near an "equilibrium" value, and he repeated a long-standing IMF call for China to allow greater flexibility in its yuan currency.

Last week, in an interview in the Financial Times, the outgoing IMF chief said the dollar was undervalued on many measures used by the IMF to evaluate currencies. While it was unclear whether Rato misspoke, the IMF's official line has long been that the U.S. currency is overvalued by between 15 to 35 percent.

Rato said it was important that currencies' value be determined by market forces and the IMF's work on exchange rate surveillance looked at various measures to determine the actual and medium-term equilibrium exchange rates of a currency.

"In that respect we see the dollar is overvalued and we see the euro at very near an equilibrium situation," he added.

The dollar fell to a record low against the euro and against a basket of currencies earlier this month.

Group of Seven finance ministers from the United States, Britain, France, Germany, Italy, Japan and Canada are expected to weigh into issues such as the weakening dollar, the global credit crunch and slowing world growth when they meet in Washington later this week.

U.S. Treasury Secretary Henry Paulson reiterated last week that he backed a strong dollar, but economists have pointed out that a weak dollar is boosting U.S. exports and bolstering the economy at a time when domestic demand may be faltering.

Rato said although there had been a reduction in the U.S. current account, it was not a significant decline.

"To address that, we believe that domestic policies are needed," he said, noting these should include strengthening public and private-sector savings and structural changes in health and pensions.

Rato said the U.S. economy would be able to absorb the impact of a slowdown in its housing market and there was still a lot of strength left in the economy.

In Europe, Rato said policies were needed to strengthen the bloc's growth potential,

Meanwhile, China needs to rebalance its growth and rely more on domestic consumption, he said.

"Certainly, they need to use monetary policy in a more efficient way to focus on prices," he said, repeating that the Chinese currency "should have a more flexible movement that would reflect the realities of the Chinese economy."

SLOWING GLOBAL GROWTH

Turning to the global economy, Rato said it would take time to analyze the full impact of the global credit crunch but it was already clear that growth was slowing "but not in a dramatic way."

Rato said risks of a slowdown to the global economy had increased, and especially vulnerable were the United States, Japan and Europe.

The fund has already said it plans to cut its economic growth forecast for the United States and much of the developed world in its upcoming World Economic Outlook, being published in full on Wednesday.

"If this disruption in financial markets continues and there is a further fall in asset prices, this of course could lead to a higher downturn," Rato said.

He said the IMF had therefore advised member countries to proceed with caution, adding that central banks' policy response to the turmoil had so far been "appropriate".

The credit problems began with a wave of foreclosures in the U.S. subprime mortgage market, but quickly spread worldwide because the loans were packaged in complex financial securities and resold to investors.

As policy-makers and IMF mull over what caused the credit crunch, Europe has pushed for greater oversight of credit rating agencies.

Rato said countries should not overreact and "regulate the crisis out of existence" until the situation was fully understood.

"The events we have gone through, and still going through, have exposed weaknesses in the regulatory infrastructure and has made us think twice about how to make that regulatory infrastructure strong and more simpler," he added.
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I've been a dollar bear for a long time, but this is getting a little old. I'm sure he's talking his book / best interest, however that works out.

Am I the only one cheering the FOMC along thinking they may have played this rate cut -properly- ???

Assuming they don't cut rates anymore into this weak dollar environment, I think their decision is going to look very bullish for the US economy and dollar in the long run.

Right now everyone is piling out of the dollar, into the gold and oil, etc. and things look nasty. But we know what happens when trades are one sided, in the end.

Long term, the fundamentals are not good w/ entitlements, national debt, etc. I still agree. But other developed countries like Japan have it even worse (check percentage of GDP to national debt for example).
 
Wait a minute - I thought I was the only one cheering the FOMC for what they've done so far.
Anyway, your last line about how other countries are in even crazier situations than the US, is why gold will rise against all currencies over the next 5 to 10 years, IMO. That's my long-term strategy.
 
There have been numerous academic and CB research efforts since the seminal Meese/Rogoff paper of 1983 to build a fundamental model of exchange rates movements and valuation. The majority have failed woefully (though PPP has 'worked' on a long-term basis in some) , so if the IMF has a model that can be relied upon, it should be a Nobel prize nominee.

A while ago I looked back at what happened to FX moves after an IMF pronouncement, and the results showed no significant volatility. Ditto today.

As the earlier poster commented, perhaps Rato is best faded.
 
Quote from trefoil:

Wait a minute - I thought I was the only one cheering the FOMC for what they've done so far.
Anyway, your last line about how other countries are in even crazier situations than the US, is why gold will rise against all currencies over the next 5 to 10 years, IMO. That's my long-term strategy.
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Only problem with gold is besides jewelry its relatively useless.

What happens when the the yuan strengthens, china's economy slows, and policymakers decide they don't have the desire to pursue gold as a reserve asset?

At least you can turn oil into productivity. You can't do that with gold.. If investor psychology turns and jewelry demand backs off, gold will bust just like the rest.

[not saying it won't get to 1000-1500oz] before that happens.

What we need is a chinese recession to get commdities under control. The only way that happens is if we decide to end the cheap yuan permanently and go protectionist. Of course, we'll pay the price [literally]. I was looking at all the electronics I've bought the past few yrs -- literally everything is made in china. My wife's Macbook, my laptop, printers,etc .... I remember once upon a time made in Taiwan or Indonesia was common. Not as much anymore, it seems.

OMG.. I just looked at HSI and china enterprise index. They just bought right thru our selling. Literally unstoppable.
 
Quote from scriabinop23:

OMG.. I just looked at HSI and china enterprise index. They just bought right thru our selling. Literally unstoppable. [/B]
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Of course. The Communist Party's National Congress is now underway. No chance of a plunge in this period!
 
Does anyone actually think the IMF is a legitimate organization? It was created to keep the third world nations perpetually under deficit spending.

As Argentina and the Thai have shown, doing exactly opposite of what the IMF suggests is the right thing to do. So it's probably a great time to start looking for a USD long position.
 
Actually, some asian countries (China, Japan, Taiwan..) are solving USD to decrease their holdings and it will affect to down USD more, right?

I assume that they will change the balance ratio in their holdings to EUR and Sterling.
 
Quote from aeliodon:

IMF said today that USD was still very overvalued. And not only that, they think its overvalued by 15%-35%.
So what's your currency hedge strategy?
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My hedge is to live in Europe ! :D
 
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