IMF says U.S. dollar overvalued
Global lender says global trade imbalances have left the U.S. dollar overvalued, asks for reforms. September 19, 2002: 1:10 PM EDT
WASHINGTON (Reuters) - Global trade imbalances have left the U.S. dollar overvalued, are unsustainable and call for prompt reforms in the United States, Europe and Japan, a new International Monetary Fund report said.
"With the U.S. current account deficit remaining in the range of 4 percent of GDP, an historical record, there is continuing concern that the dollar may be overvalued," the IMF said in its semiannual World Economic Outlook, issued Wednesday.
But the risk to the global economy goes beyond the U.S. position alone. The report said the imbalances between nations with surpluses, notably the euro area and Japan, and deficit countries like the United States, have "risen to levels almost never seen in industrial countries in the post-war era."
Perhaps more worrying, the IMF research suggested the situation could worsen in the coming years and concluded that the existing imbalances were unlikely to be viable.
It also said the possibility of a disorderly correction cannot be ruled out -- something that could produce a sharp correction in exchange rates among major currencies and a steep decline in global economic activity.
"Historical experience with large imbalances suggests that the reduction in external current account imbalances over the next few years is likely," the IMF report said.
But the IMF report said if policymakers take corrective action, the current nexus does not have to end in a major disruption to the global economy.
For the United States, the IMF said, authorities should tighten medium-term fiscal policy, encourage private saving and take measures to boost investor confidence.
In Europe, the lender suggested reducing labor-market rigidities and increasing competition in product markets, while in Japan banking and corporate reforms top the list of needed measures that would boost potential economic growth.
The IMF has been urging the United States, Europe and Japan to undertake those exact reforms for some time, with little success because of the political dynamic in each region.
Reining in U.S. government spending could prove unpopular with voters and would run counter to increased spending on the Bush administration's war on terrorism. European efforts at labor-market reforms are typically met with stiff resistance from labor unions. And in Japan, where the economy is suffering recession and deflation, policy options are limited.
> Dennis Robert Redmond <dredmond at efn.org> writes:
>
> > No, the crossholdings have worked remarkably well. The Nikkei at 9000
> > still means that total market capitalization is somewhere around 65% of
> > Japanese GDP -- comparable to the EU. The US figure is still somewhere
> > around 115% or so, I think, implying that there's plenty of room for the
> > Dow to fall further.
>
> That's a remarkable figure, and supports your point well against
> my unsupported speculation.
>
> If falling equity prices aren't the source of reserve requirement
> problems for Japan's commercial banks, though, what is the BOJ
> trying to accomplish? Support share prices themselves? Try
> something new? Precipitate a crisis?
>
> Apropos of Paula's initial post, Randall Forsyth wrote in
> _Barron's_ today:
>
> What can be said with certainty is that the BOJ's decision has
> been a disaster for the Japanese bond market.
>
> For the first time, the government Friday was unable to attract
> sufficient bids for an auction of $14.6 billion bonds.
>
> So the non-bank side of the bond market, insurers, I guess, are
> voting against the stock purchase proposal with their yen.
>
> Where's the wa in that?
>
> Chris