IMF Disses Dollar
The International Monetary Fund dissed the dollar in its annual External Sector Report, saying the greenback is overvalued.
According to a Reuters report, the IMF report also said that “nearly half of global current account balances are now excessive, adding to growth risks and trade tensions.”
Interestingly, the IMF said the Chinese yuan was “in line with fundamentals.”
The dollar has strengthened significantly over the last couple of months. The greenback surged again late last week and was near a one-year high after European Central Bank President Mario Draghi announced the bank’s governing committee doesn’t expect to raise interest rates until at least the summer of 2019. That drug down the euro compared to the dollar. The ECB interest rate remains at zero. Draghi said the central bank does expect to start cutting back its bond-purchasing program in September and end the program in December.
Peter Schiff has been skeptical of the strengthening dollar, calling it a “bear market rally.”
I think the dollar is going to run into some resistance. I thought it might have already happened. Maybe it’s going to go a little higher, but to me, the primary trend is down. We are in a bear market. The bear market started in January of last year, but there’s always corrections in every market whether it’s bull or bear. In this case, if I’m right, this is early in a dollar bear this is one of the first corrections – the correction being the up-move and it’s sowing the seeds of its own destruction.”
In a podcast earlier this summer, Peter pointed out that the real dollar strength is against emerging market currencies. This is problematic because it is putting even more pressure on their already increasing inflation rates. Politicians in these emerging markets are resisting raising interest rates which would help combat increasing inflation and support a weakening currency. This unwillingness to act is adding fuel to the fire.
And as we’ve seen, it’s not just emerging markets that are resistant to raising interest rates. The ECB is playing that game as well, keeping the euro relatively weak compared to the dollar.
Peter is not the only one skeptical of this dollar rally. Some in the mainstream have expressed doubts about whether it can last. For instance, last month TD’s Bart Melek hit this theme at a precious metals conference in Singapore, predicting gold will rebound in 2019 as the dollar weakens.
As time moves on, there’ll be less and less reasons to get into the US dollar, which will likely reverse some of the flows. We do ultimately think that as we move into 2019, the US dollar will weaken, which is a very powerful fuel for the gold complex.”
In its External Sector Report, the IMF asserted that the dollar was over-valued compared to levels implied by medium-term fundamentals by about 8 to 16 percent. If the IMF is right, it lends support to the idea that the dollar will not be able to sustain its recent rally. Things that are overvalued tend to eventually fall back in line with fundamentals.
The IMF report also focused on current account surpluses and deficits. It said China, Germany, South Korea, the Netherlands, Sweden and Singapore all have excessive surplusses. According to Reuters, countries the IMF cited as having excessive current account deficits — those that borrow too much — included the United States, Britain, Turkey and Argentina.
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