Dollar depreciation reflects value: IMF's Lipsky

Lipsky also warned that the euro was overvalued and that currencies in many current-account-surplus countries, including China, remain substantially undervalued.

The IMF's analysis of real exchange rate levels show the dollar to have declined by 25% since early 2002 - what Lipsky described as "one of the largest sustained episodes of dollar depreciation in the post-Bretton Woods era."

The deputy managing director said similarities existed between the current depreciation and past episodes. "The largest previous such episode - where the dollar depreciated by over 30% in real effective terms - took place between 1985 and 1991, also against the background of a large US current-account deficit," said Lipsky. "In both episodes, the pace of depreciation was relatively gradual, with daily changes below 2-3% in nominal effective terms. In both cases, the US currency in broad terms moved in line with shifts in interest rate differentials."

He added: "Moreover, in the earlier case, the dollar depreciation episode ended with the US currency's level roughly consistent with broad, medium-term equilibrium, as per Fund calculations. Following the post-2002 decline, we assess that the US currency today is the closest to its medium-term equilibrium value in a decade."

Reserve currency

The dollar would, he said, retain its central role as the global reserve currency.

"The latest combination of developments has even given rise to speculation about potential evolution in the constellation of international reserve currencies," Lipsky said. "Notwithstanding the dramatic claims by some, 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."

He added: "While the dollar will not be replaced as the dominant international currency, it is quite likely that, eventually, the dollar will begin to share this role with the euro."

Euro

The euro, said Lipsky, "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."

"The lack of adjustment in the currencies of several economies with inflexible exchange rate regimes and large external surpluses has not been supportive of an adjustment in global imbalances," Lipsky said. "Moreover, to the extent that real appreciation in these currencies has taken place more recently, it is largely due to accelerating inflation - hardly an ideal outcome."

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