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News : Global Economy Last Updated: Oct 29, 2010 - 9:28:03 AM

IMF says US dollar is 'overvalued' on currency markets while China's yuan/renminbi is 'substantially undervalued'
By Finfacts Team
Oct 29, 2010 - 8:10:23 AM

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The International Monetary Fund (IMF) said on Thursday that the US dollar is 'overvalued' on currency markets, while China's yuan/renminbi is 'substantially undervalued'

The Fund said in a report prepared for last weekend's meeting of G-20 finance ministers and central bankers that the real effective exchange rates of Japan, the Eurozone, and the UK all appear broadly in line with medium-term fundamentals, while the US dollar is on the strong side of fundamentals. The report said while advanced economies have generally avoided intervening in currency markets, some have intervened more recently to limit rapid appreciations, contributing to the tension on this issue.

The report says capital inflows should help external rebalancing, but much depends on how they are put to use and - - perhaps more importantly - - the extent to which they are accompanied by exchange rate appreciation. The policy response to capital inflows in key emerging surplus economies, notably in Asia, has been to intervene in foreign exchange markets to accumulate reserves and limit currency appreciation, contributing to continuing significant exchange rate misalignments relative to fundamentals - -  for instance, the Chinese reminbi remains substantially undervalued. At the same time, some other emerging economies, notably South Africa and countries in Latin America, have allowed their currencies to appreciate substantially in nominal effective terms, boosting real-effective exchange rates to levels that are looking increasingly overvalued. The significant cross-country differences in the extent of de facto exchange rate flexibility and the limited scope for policy responses in countries receiving large inflows is stirring some tension across G-20 members.

The US currency has fallen in recent weeks on expectations that the Federal Reserve will next week restart major large-scale asset purchases - -  effectively money printing  -- to support the flagging recovery.

Asian Development Bank (ADB) President Haruhiko Kuroda on Tuesday called for developing Asia's members of the influential Group of 20 (G-20) to take greater responsibility in driving global economic reform.

"Asia's G-20 members must play a proactive role in the G-20 framework to ensure that its policies and measures reflect regional goals and development priorities," said Kuroda in his opening remarks to a conference organized by the ADB and the Peterson Institute of International Economics. The conference was entitled "Reshaping Global Economic Governance and the Role of Asia in G-20."

The ADB President, speaking ahead of the G-20 summit to be held in South Korea next month, noted that the diversity in levels of development and priority differences among G-20 members suggest hurdles exist before reaching political consensus. "As important stakeholders in this, Asian economies - - both individually and collectively - - hold the key to resolving these issues of conflicting interests."

"As the world's premier economic forum, the burden is now on the G-20 to ensure better policy dialogue and cooperation," he said.

G-20 finance ministers and central bank governors, meeting last weekend in the South Korean city of Gyeongju, agreed to avoid competitive currency devaluations and curb excessive trade imbalances but a proposal to set specific targets ran into opposition. The Group of Twenty industrialized and emerging market economies also agreed on a proposed raft of "historic" reforms of the IMF that will shift country representation at the Fund toward large, dynamic emerging market and developing countries.

The G-20 comprises Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, the United Kingdom, and the United States, plus the European Union. To ensure global economic fora and institutions work together, the Managing Director of the International Monetary Fund and the President of the World Bank, plus the chairs of the International Monetary and Financial Committee and Development Committee of the IMF and World Bank, also participate in G-20 meetings on an ex-officio basis.

Together, member countries represent around 90% of global gross national product as well as two-thirds of the world’s population.

If QE isn't introduced in phases, Andrew Leung, founder of Andrew Leung International Consultants, says the U.S. dollar will pulled down to a 'dangerous' tipping point. He explains why to CNBC's Bernard Lo:

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