The U.S. dollar is overvalued by 24 percent against other major currencies, a serious misalignment that could depress major export industries, leading to deindustrialization, more pressure for protectionism, or both, according to a new study published here.
John Williamson of the Institute for International Economics said Tuesday that major exchange rates could be brought more into what he called "fundamental equilibrium" if major countries agreed to adopt "target zones" for their currencies that would be monitored by the International Monetary Fund.
He said that "the great failing of floating rates is the large misalignments they have allowed to emerge," which have resulted in a global "roller coaster of boom followed by austerity."
According to Williamson's estimates--which he concedes are imprecise--the two major currencies that are overvalued against all others are the dollar (24 percent) and the British pound (18 percent). Three other major currencies are undervalued: the Japanese yen and West German mark by 5 percent each, and the French franc by 6 percent. The currencies of most smaller industrial nations also are undervalued, he said.
The dollar was said to be overvalued by 16 percent against the yen; 23 percent aginst the mark; 24 percent against the franc, and 5.3 percent against the pound.
According to the report, if "equilibrium" rates prevailed, the yen would be 205 to the dollar instead of 243 recently, the mark would be 2.04 to the dollar instead of 2.65, the franc would be 6.05 to the dollar instead of 8, and the pound would be quoted at $1.58 instead of $1.50.
Williamson's definition of an equilibrium rate is one that would achieve underlying competitive balance for each of those five key currencies.
The major way that countries would get their currencies within the established zones would be to modify monetary policy. For the United States, this would require a major change, because the Federal Reserve Board does not take exchange rates into account when setting monetary policy.
Critics of efforts to peg exchange rates at exact figures or zones have argued that it is impossible to know what the equilibrium rate actually is, and that it is best to leave the matter to the operation of the exchange market.
Williamson argues that the matter is too important to leave to the free market, which has produced irrational and volatile results.
"Governments ought to be willing to think of a limited degree of management of exchange rates," he told a press conference. He pointed out that a 20 percent zone would allow for "soft margins, and some deviation."
Contrary to belief in Europe, the yen did not show up as seriously undervalued against European currencies. In fact, the mark shows up as the weaker of the two currencies. In part, the yen exchange rates against European currencies are distorted by the restrictions that Europe has placed on Japanese exports, Williamson said in a telephone interview.