For the fourth time in four years, the International Monetary Fund (IMF) has said the U.S. dollar is overvalued. The IMF's latest External Sector Report, however, reveals China's yuan is in line with fundamentals.
The report again assesses the U.S. dollar to be overvalued, this time from eight percent to 16 percent in 2017 compared to levels implied by medium-term fundamentals. The IMF said the dollar was overvalued by 10 to 20 percent in 2016 based on U.S. near-term economic fundamentals
Last year, the IMF recommended that U.S. authorities take steps to slash its huge current account deficit (which still remains enormous) by reducing the federal budget deficit; passing structural reforms to increase the anemic savings rate and improving economic productivity.
"It's important to address imbalances, because if they're not dealt with appropriately and through the right policies, we could have a backlash in the form of protectionism," said IMF Research Division Chief Luis Cubeddu in July 2017 in an insightful comment that has since come true because of Trump's trade war.
The U.S. imbalances in 2016 continue until today, however. The U.S. current account deficit widened to $124.1 billion or 2.5 percent of the GDP, in the first quarter of 2018 from $116.1 billion in the fourth quarter of 2017. It is the biggest current account deficit since the last quarter of 2008 and has again led to an overvalued dollar.
America's current account have averaged $47.7 billion from 1960 until 2018, reaching an all time high of $10 billion in the first quarter of 1991 and a record low of $21.6 billion in the third quarter of 2006. The U.S. federal government saw a budget deficit of $666 billion in fiscal 2017, the biggest shortfall since 2013.
The IMF's newest External Sector Report reported that nearly half of global current account balances are now excessive, a development that stokes growing risks and trade tensions between the U.S. and practically all of its largest trading partners. The IMF report also said current account surpluses and deficits are becoming increasingly concentrated in advanced economies.
The IMF's External Sector Report assesses exchange rates and current account surpluses and deficits among IMF member countries, and is based on data and projections as of June 22.
It noted a significant fall in the yuan's value over the past few weeks amid worsening trade tensions with the United States. The yuan sank to a fresh 13-month low on July 24 of 6.8295 to the dollar as the People's Bank of China, the de facto central bank, refused to intervene to prop up the yuan so as to support Chinese exporters being battered in the tariff war with the United States.
The IMF estimates China's current account surplus grew slightly last year to 1.7 percent of Gross Domestic Product. It also listed China among countries with excessive trade balances.
Other excessive trade surplus countries cited by the IMF include Germany, South Korea, The Netherlands, Sweden and Singapore. Countries the IMF says have excessive current account deficits, and which borrow too much, include the United States, Britain, Turkey and Argentina.
