The euro is now overvalued, while the US dollar's decline has brought it closer to its medium-term equilibrium in a decade, a top official at the International Monetary Fund said yesterday.
The IMF had previously said the euro was on the "strong side" of its fundamentals. Last week, the euro nudged above $1.60, putting more pressure on European exporters who complain the currency's rise is bad for business, especially when global economic growth is slowing.
"In our view, the euro is now overvalued relative to medium-term fundamentals, while the currencies of many current account surplus countries, including China, remain substantially undervalued, despite a small appreciation in real effective terms," John Lipsky, the IMF's deputy managing director, said in a speech at the Brookings Institution.
"Following the post-2002 decline [in the dollar's value], we assess that the US currency today is the closest to its medium-term equilibrium value in a decade," he added.
Lipsky noted that the decline in the value of the dollar was helping bring down the US current account deficit, but that may be offset by record-high energy prices that were driving up surpluses in oil-exporting countries.
As a result, "new misalignments may be emerging and risks may be shifting", he said adding that despite the dollar's decline, the currency retained its leading role in international transactions and as a reserve currency.
"In spite of the dramatic claims, there is no doubt that the dollar will retain the central role, even though it may gradually share the stage with other currencies to a greater degree than at present," Lipsky said.
While the dollar will not be replaced as the dominant international currency, but it might share this role with the euro, he added.
He said the Chinese currency's importance could also increase as China's economy grows in size, but this would require full currency convertibility and a track record of low inflation.
In the first quarter of 2008, the dollar made up nearly two-thirds of central bank international holdings. Emerging economies, which have amassed trillions of dollars in reserves, have an average dollar share of around 60 per cent, roughly unchanged since 2004.