Dollar still overvalued against Asia: study

By Alister Bull

WASHINGTON (Reuters) - The dollar is still overvalued despite a prolonged slide against the euro and pound but the misalignment is now almost entirely with Asia, according to a study released on Wednesday.

Economists at the Peterson Institute, using fundamental equilibrium exchange rates, found the Chinese yuan ought to rise by about another 30 percent while the yen should advance 20 percent against the U.S. currency.

The yuan "is clearly fundamentally misaligned and seriously undervalued," said John Williamson, who coauthored the report with William Cline, both senior fellows at the Washington think-tank for international economics.

China has already allowed its currency to rise around 18 percent against the dollar since loosening its grip on the exchange rate in 2005. But the country's trade surplus and foreign exchange reserves have continued to climb.

Peterson Institute director Fred Bergsten noted that Chinese currency intervention had doubled since the country adopted a supposedly more market-orientated exchange rate, illustrating the degree to which it was still manipulating the yuan to keep Chinese exports artificially cheap.

On the other hand, the dollar's weakness against the European single currency and the British pound have helped pare the U.S. current account deficit, while helping keep the country out of recession by boosting export earnings amid a housing slump.

"We have had a gradual, orderly depreciation in the value of the dollar in the last six years that has achieved about 80 percent of the adjustment that we were calling for," Bergsten told a luncheon where the report was presented.

Bergsten was referring to his long-standing call for a dollar revaluation to help reduce the country's current account deficit, which has fallen from a peak equal to more than 6 percent of gross domestic product to 5 percent in the first quarter.

The report gauged the currency adjustment needed to bring a range of countries' current account balances to within a 3 percent deficit or surplus. The report chose this target for consistency with other work identifying 3 percent as a rule of thumb for an economy's highest sustainable threshold.

"The euro and the pound are now overvalued on average. They have not overshot greatly against the dollar, however, and the depreciation in their effective exchange rates should come largely from the appreciation of a number of Asian currencies," the report noted.

In addition, it found that the Singapore dollar should rise over 40 percent against the dollar and the Swiss franc needed to appreciate by around 24 percent.

(Reporting by Alister Bull; Editing by Leslie Adler)