The US Dollar is overvalued in the region of 6% to 12%, according to the latest International Monetary Fund report. The latest External Sector Report (an assessment of currencies, surpluses, and deficits) determined that while the Euro, Yen and Yuan were all broadly in line with the valuation expected, the US Dollar was too strong.
In response to yesterday’s report, the price of gold shot up by almost £20 per ounce, peaking at £1,148.59 in the early hours before slowly falling back to the current price of £1,138.45.
The report is likely to please President Trump, who has repeatedly argued for the Federal Reserve to act and help make the Dollar cheaper so that America can compete with the interest rate cuts in the Eurozone, as well as the alleged deliberate devaluing of the Yuan in China. When Trump first entered office he was stuck down the middle of the Dollar debate; he wanted a weak Dollar, and often voiced that wish, but describing a preference for your nation’s currency to be weak isn’t a strong PR move, leading the President to back-and-forth on the issue for many months.
A weaker Dollar would make US goods more competitive with other major nations and provide a boost to exports; a much-needed boost given that the United States is currently at a 10-year high for the trade deficit. Even with the tariffs put in place against China, the gap between the US and China specifically has also grown.
The IMF report delved into the ongoing trade war and warned that the global economy could slow by 0.5% in 2020, at a cost of $455 billion in lost trade and damaged trade flows.
Gita Gopinath, the IMF’s chief economist, told reporters: “It is imperative that all countries avoid policies that distort trade.
“Higher tariffs have been associated with increased prices for consumers and are weighing on global trade, investment and growth, including by eroding confidence and disrupting global supply chains.”
The news that the US Dollar is overvalued will be some relief to the United Kingdom, with the Pound currently struggling just above a 27-month low against the Dollar. Yesterday it fell to a low of $1.2382 – the first time it had been at that level since March 2017. Sterling has since risen back to $1.24724, but the ongoing concerns about a no-deal Brexit and a new ‘Brexiteer’ Prime Minister in the coming days have severely damaged investor confidence.
Investment bankers Morgan Stanley yesterday issued an internal memo warning that the combination of the weak Pound, strong Dollar, and a no-deal Brexit could result in currency parity within a range of 10 cents.
The memo read: “The pound has come under intense selling pressure since Prime Minister May withdrew from her party leadership position, leaving markets with increased concern that the UK may be heading towards a harder Brexit.
“Should this scenario materialise, pound-dollar could fall into the $1.00-$1.10 range.”