The quarterly CPA Monitor tracks currency misalignment based on latest monthly exchange rates.
Dollar overvaluation remains at a high 16.8%, but this may change in future months after the Federal Reserve cut rates by half a point in September and signaled continued monetary easing.
The Mexican Peso lost substantial value, now undervalued against the dollar by 15% compared to only 2% in July. The Brazilian Real also slipped from a 2% overvaluation in July to a 3% undervaluation in August.
The Euro, Chinese Yuan, and Japanese Yen all remain substantially undervalued at 19%, 24%, and 32% respectively based on the latest published monthly exchange rates, which are for August.
The U.S. dollar remains at about the same worldwide valuation in our latest quarterly Misalignment Monitor, continuing to create a double-digit import incentive to the great disadvantage of domestic U.S. producers. This continues the long-term trend of the increasing appreciation of the U.S. dollar against a basket of other global currencies. Since 2011, the U.S. dollar value has risen over 35% according to the Federal Reserve despite a persistent trade and current account deficit
A recent CPA analysis found that the effect of the U.S. dollar overvaluation on American manufacturers equated to a $520 billion import subsidy for foreign goods in 2023. The U.S. dollar overvaluation also continues to overprice U.S. goods in the world market, making our exports much less competitive. In 2023, the currency effect on U.S. exports amounted to a $341 billion export penalty.
The CPA Currency Misalignment Monitor uses a sophisticated mathematical model to determine a set of currency values that would eliminate all trade surpluses and deficits among major nations over the next five years. We use data from respected international institutions, the International Monetary Fund and the Bank for International Settlements.
Our Monitor for October shows that the dollar is 16.8% overvalued. That figure is based on all currencies adjusting simultaneously to move the world to balance. (If the U.S. dollar had to move on its own to put the U.S. into trade balance, the adjustment needed would likely be on the order of 25%.)
East Asian countries in particular benefit tremendously from the substantial overvaluation of the dollar, and the undervaluation of their own currencies. Countries like China and Japan have allowed or even encouraged their currencies to depreciate to help stimulate exports and encourage domestic economic growth. Meanwhile, their imports into the United States are essentially subsidized by the overvalued dollar. Japan’s currency undervaluation is especially large, with the yen at 158 to the dollar, compared to an equilibrium value of 120 in our model.
China’s currency also continues to fall in value, reaching 7.25 to the dollar in August. Despite this long-term slide, China has already posted a cumulative $700 billion trade surplus from January through August 2024, putting China on track for a $1 trillion trade surplus for 2024.
Even though East Asian countries are the most egregious examples of the currency misalignment issue, the Euro and Mexican Peso are also substantially undervalued against the dollar. The Euro is undervalued by 18.6% and the Peso is now undervalued by 14.8% (compared to just 2.2% in July). This is despite the constant and widening U.S. trade deficit with these countries. The United States’ trade deficit with the Eurozone is set to increase 12% to $197 billion in 2024. Meanwhile, the U.S. trade deficit with Mexico is set to increase by 8%, reaching $164 billion in 2024.
Table 1. Currency valuations from the Currency Misalignment Monitor, October 2024
Notes: 1. % Over/Undervaluation is for U.S. dollar’s Real Effective Exchange Rate as compared to the basket of currencies. For all other currencies, over/undervaluation refers to bilateral relationship to the dollar. Blue figures indicate overvaluation and red figures indicate undervaluation.
2. FEER-consistent rate shows bilateral dollar exchange rate after each currency has moved to its Fundamental Equilibrium Exchange Rate.
3. Pound and Euro rates are expressed as dollars per those currencies. All others are currency per dollar.
The CMM is based on a mathematical model in which 34 major currencies all move simultaneously to bring global current accounts into balance over a five-year time horizon. If the dollar had to move on its own, the dollar would need to move by approximately twice as much, or around 25%, to achieve fair value for the U.S. economy, i.e., a value that eliminated the current account deficit. The current account deficit is dominated by the trade deficit, but also includes some other financial flows into and out of the U.S.
METHODOLOGY
The Currency Misalignment Monitor is based on pioneering work done by William Cline at the Peterson Institute for International Economics. The Cline model, also known as SMIM for Symmetric Matrix Inversion Method, uses IMF forecasts for current account balances for 34 nations to derive a simultaneous solution for all exchange rates that will minimize national current account balances, including surpluses and deficits. The CMM uses this methodology. However, the Cline version sets a target of plus or minus 3% of GDP for each nation’s current account. We believe this is too flexible for a properly functioning global trading system. Our model sets a target of 0% current account balance for each nation. Most nations do not achieve 0% in year five, but the model seeks to get them as close to zero as possible and in so doing gives us a realistic sense of each currency’s over or undervaluation.
Note also that this methodology is dependent on IMF forecasts, which currently run from 2024 data out to 2029. The IMF has a history of optimism, including for example expectations that the U.S. current account deficit and the China surplus will both contract over time. If those forecasts turn out to be over-optimistic, then the misalignment estimates in the Monitor could well be understated. Nevertheless, the Cline SMIM model is an innovative method for incorporating a large amount of global data into a single model.
MADE IN AMERICA.
CPA is the leading national, bipartisan organization exclusively representing domestic producers and workers across many industries and sectors of the U.S. economy.
Currency Misalignment Monitor, October 2024
KEY POINTS
The U.S. dollar remains at about the same worldwide valuation in our latest quarterly Misalignment Monitor, continuing to create a double-digit import incentive to the great disadvantage of domestic U.S. producers. This continues the long-term trend of the increasing appreciation of the U.S. dollar against a basket of other global currencies. Since 2011, the U.S. dollar value has risen over 35% according to the Federal Reserve despite a persistent trade and current account deficit
A recent CPA analysis found that the effect of the U.S. dollar overvaluation on American manufacturers equated to a $520 billion import subsidy for foreign goods in 2023. The U.S. dollar overvaluation also continues to overprice U.S. goods in the world market, making our exports much less competitive. In 2023, the currency effect on U.S. exports amounted to a $341 billion export penalty.
The CPA Currency Misalignment Monitor uses a sophisticated mathematical model to determine a set of currency values that would eliminate all trade surpluses and deficits among major nations over the next five years. We use data from respected international institutions, the International Monetary Fund and the Bank for International Settlements.
Our Monitor for October shows that the dollar is 16.8% overvalued. That figure is based on all currencies adjusting simultaneously to move the world to balance. (If the U.S. dollar had to move on its own to put the U.S. into trade balance, the adjustment needed would likely be on the order of 25%.)
East Asian countries in particular benefit tremendously from the substantial overvaluation of the dollar, and the undervaluation of their own currencies. Countries like China and Japan have allowed or even encouraged their currencies to depreciate to help stimulate exports and encourage domestic economic growth. Meanwhile, their imports into the United States are essentially subsidized by the overvalued dollar. Japan’s currency undervaluation is especially large, with the yen at 158 to the dollar, compared to an equilibrium value of 120 in our model.
China’s currency also continues to fall in value, reaching 7.25 to the dollar in August. Despite this long-term slide, China has already posted a cumulative $700 billion trade surplus from January through August 2024, putting China on track for a $1 trillion trade surplus for 2024.
Even though East Asian countries are the most egregious examples of the currency misalignment issue, the Euro and Mexican Peso are also substantially undervalued against the dollar. The Euro is undervalued by 18.6% and the Peso is now undervalued by 14.8% (compared to just 2.2% in July). This is despite the constant and widening U.S. trade deficit with these countries. The United States’ trade deficit with the Eurozone is set to increase 12% to $197 billion in 2024. Meanwhile, the U.S. trade deficit with Mexico is set to increase by 8%, reaching $164 billion in 2024.
Table 1. Currency valuations from the Currency Misalignment Monitor, October 2024
Notes: 1. % Over/Undervaluation is for U.S. dollar’s Real Effective Exchange Rate as compared to the basket of currencies. For all other currencies, over/undervaluation refers to bilateral relationship to the dollar. Blue figures indicate overvaluation and red figures indicate undervaluation.
2. FEER-consistent rate shows bilateral dollar exchange rate after each currency has moved to its Fundamental Equilibrium Exchange Rate.
3. Pound and Euro rates are expressed as dollars per those currencies. All others are currency per dollar.
The CMM is based on a mathematical model in which 34 major currencies all move simultaneously to bring global current accounts into balance over a five-year time horizon. If the dollar had to move on its own, the dollar would need to move by approximately twice as much, or around 25%, to achieve fair value for the U.S. economy, i.e., a value that eliminated the current account deficit. The current account deficit is dominated by the trade deficit, but also includes some other financial flows into and out of the U.S.
METHODOLOGY
The Currency Misalignment Monitor is based on pioneering work done by William Cline at the Peterson Institute for International Economics. The Cline model, also known as SMIM for Symmetric Matrix Inversion Method, uses IMF forecasts for current account balances for 34 nations to derive a simultaneous solution for all exchange rates that will minimize national current account balances, including surpluses and deficits. The CMM uses this methodology. However, the Cline version sets a target of plus or minus 3% of GDP for each nation’s current account. We believe this is too flexible for a properly functioning global trading system. Our model sets a target of 0% current account balance for each nation. Most nations do not achieve 0% in year five, but the model seeks to get them as close to zero as possible and in so doing gives us a realistic sense of each currency’s over or undervaluation.
Note also that this methodology is dependent on IMF forecasts, which currently run from 2024 data out to 2029. The IMF has a history of optimism, including for example expectations that the U.S. current account deficit and the China surplus will both contract over time. If those forecasts turn out to be over-optimistic, then the misalignment estimates in the Monitor could well be understated. Nevertheless, the Cline SMIM model is an innovative method for incorporating a large amount of global data into a single model.
MADE IN AMERICA.
CPA is the leading national, bipartisan organization exclusively representing domestic producers and workers across many industries and sectors of the U.S. economy.
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Currency Misalignment Monitor, October 2024
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