Estimates of Fundamental Equilibrium Exchange Rates, May 2011
This policy brief updates Cline and Williamson's estimates of fundamental equilibrium exchange rates (FEERs) to April 2011. Most currencies appear to have been reasonably close to their FEERs in April 2011. The most important exceptions are China, on the weak side, and the United States, on the strong side. The countries that need to seek weaker effective rates are those with large current account deficits: Australia and New Zealand, South Africa, Turkey, (marginally) Poland and Hungary, and the United States and Brazil. These are countries with floating exchange rates that have been pushed to an overvalued level by (in most cases) capital mobility and the carry trade, reinforced in the case of the United States by the dollar's role as the currency to which many other countries peg combined with the decision of some other countries to peg their rates at an undervalued level. The countries that need to revalue their effective rates are primarily Asian: China and countries that make it a priority to avoid losing competitiveness versus China (Hong Kong, Malaysia, Singapore, and Taiwan). The authors' calculations show the need for a slightly larger effective revaluation of the Chinese currency, the renminbi, this year (17.6 percent) than last (15.3 percent) and a larger appreciation of the renminbi in terms of the dollar (28.5 percent rather than 24.2 percent).