U.S. Dollar | US Dollar Way Overvalued Says Study by Peterson Institute for International Economics

U.S. Dollar

The U.S. dollar is "seriously overvalued," mostly against the Chinese renminbi and some other Asian currencies, according to a new study published on Wednesday.

The Peterson Institute for International Economics, a Washington-based think tank, said the majority of the 29 currencies it studied need to appreciate against the dollar, with a large rise especially needed by the Chinese currency.

"The principal counterpart to the overvalued dollar is the undervaluation of the Chinese renminbi, which would have needed to appreciate about 21 percent on a weighted average basis and about 40 percent against the dollar to achieve equilibrium," said the study by economists William Cline and John Williamson.

Investor flight to the dollar safe haven since last year has pushed the U.S. currency up by about 10 percent, which on top of an estimated overvaluation of about 7 percent a year ago made for an overvaluation of about 17 percent by March this year, the study said.

But the dollar slid to its low in 2009 on June 1 against the euro and a basket of currencies amid optimism the prospect of a global economic recovery boosted riskier assets.

Despite the dollar's recent slump, the study said the currency remained "substantially overvalued."

Cline and Williamson said economic imbalances caused by the deficit and overvaluation of the dollar over the surplus and undervaluation of the Chinese renminbi posed systemic threats.

"It is important that as the world emerges from the current crisis these imbalances be corrected," they said.

To rebalance the global economy, Cline and Williamson argued China should change its peg from the dollar to a basket of currencies. Alternatively, China should resume the upward crawl of the peg against the dollar.

"Unfortunately, the most recent evidence points in the other direction, as the policy over the past several months of keeping the renminbi unchanged against the dollar has remained intact, despite the dollar's reversal toward a declining trend subsequent to its peak in early March."

"China has again begun to ride the dollar down," they added.

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