The IMF sees the dangers of trade tensions and the overvaluation of the USD

The International Monetary Fund announced on Wednesday that the US dollar was overvalued by 6% to 12%, based on short-term economic fundamentals, while the euro, the Japanese yen and the Chinese yuan were broadly in line with fundamentals.

The IMF disagreed with US President Donald Trump on its use of tariffs to resolve trade imbalances, but his badessment that the dollar is overvalued will likely give Trump more weight for his frequent complaints that the strength of the dollar slows US exports.

Trump protested against European and Chinese policies that led to what he calls the devaluation of the euro and other currencies against the dollar.

The Fund's external sector report – an annual badessment of the currencies and external surpluses and deficits of major economies – showed that current account surpluses remained concentrated in the euro area and other advanced economies such as Singapore, while that deficits persisted in the United States, Great Britain and the United Kingdom. some emerging market economies.

According to the report, the number of net creditors has further increased and is currently at a historical peak of about 20% of world gross domestic product, about four times the level recorded in the early 1990s. a similar level.

The Fund – which warned that the trade war between the United States and China could cost the world economy nearly $ 455 billion next year – said recent trade policy measures are weighing on global trade flows, erosion of confidence and disruption of investment. But they had done nothing to reverse external imbalances.

Instead of equal tariffs, surplus and deficit countries should work to revive liberalization efforts and strengthen the rules-based multilateral trading system that has been in place for 75 years, the IMF said.

He pointed out that the short-term financing risks were generally under control because the debtor positions were concentrated in the reserve currency savings economies. But risks remained for the global economy.

"An intensification of trade tensions or a disorderly outcome of Brexit – with additional repercussions on global growth and risk aversion – could … affect other economies that are highly dependent on foreign demand and trade. external financing, "he said.

In the medium term, trade tensions could take root and further divergences between external stocks could lead to "costly disruption adjustments for major debit economies that could spread to the rest of the world".

Deficit countries, such as the United States and Great Britain, should reduce their spending in a growth-friendly manner, while heavily surplus countries, such as Germany, the Netherlands, and Korea, should stimulate investment in public infrastructure and discourage excessive savings.

The report estimated that the valuation of the euro was appropriate for the entire euro area, but that the real effective exchange rate of the euro was 8% to 18% too low for the fundamentals of Germany, given its high current account surplus.

According to the report, while the Chinese yuan was broadly in line with its fundamentals, IMF models showed wide divergences from the desired policies, ranging from an undervaluation of 11.5% to an overvaluation of 8, 5% due to uncertainties surrounding Beijing's political outlook.