WASHINGTON — The Coalition for a Prosperous America (CPA) today announced the launch of the Currency Misalignment Monitor (CMM), a new monthly index that tracks the misalignment of global currencies, including the dollar, in relation to the levels needed to balance global trade. The CMM uses the latest available data to estimate the level of overvaluation or undervaluation for the world’s major currencies. The CMM is published in partnership between the Coalition for a Prosperous America (CPA) and the Blue Collar Dollar Institute (BCDI). Last year, the CPA Economics Team released a study, using widely accepted methodology and International Monetary Fund (IMF) data, showing that currency misalignment poses a serious challenge to U.S. reindustrialization efforts.
Fair valuation for a nation’s currency is a vital component of a nation’s global competitive position. When exchange rates are “aligned”, as they should be, they are driving the current account of a country towards balance. The U.S. dollar has been misaligned, in an overvalued position, for almost all of the past 50 years, causing persistent trade deficits, deindustrialization, slower economic growth and greater income inequality. Meanwhile, other nations have allowed their currencies to remain undervalued, or have deliberately managed their currencies to achieve undervaluation, enabling them to run large trade and current account surpluses which enable strong industrial and economic growth.
Using the latest market rates, the CMM shows that the majority of the ten most important currencies are undervalued. The Japanese yen is undervalued by 27.7%, the most in the world. The Chinese yuan is second at an 18.9% undervaluation. The Euro is undervalued by 16.3%.
In contrast, the U.S. dollar is the most overvalued currency at 11.2% which helped cause the record goods deficit last year, the Brazilian real is overvalued by 7.7%, the Mexican peso is overvalued by 2.4%, and the British pound is overvalued by 1.3%.
Table 1. Currency valuations from Currency Misalignment Monitor, March 2023
|Currency Misalignment Monitor, March 2023|
|Currency||Over or Under||% Over/Under valuation||Latest rate||FEER-consistent dollar rate|
|Notes: 1. % Over/Undervaluation is for each currency’s Real Effective Exchange Rate as compared to the basket of currencies. Red figures indicate overvaluation compared to basket.|
|2. FEER-consistent rate shows bilateral dollar exchange rate once 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 overvalued U.S. dollar is the key obstacle to America’s manufacturing competitiveness and has been a significant cause of the offshoring of our nation’s productive capacity and high-quality jobs,” said CPA Chairman Zach Mottl. “It is important that policy makers shift from thinking about the dollar solely from a Wall Street financial trader mindset to how our national currency should be re-aligned to achieve a balanced current account. CPA’s new Currency Misalignment Monitor is an important index that will consistently show how the overvalued dollar, compared to other foreign currencies that are undervalued, continues to put the brakes on America’s economic growth.”
“The Federal Reserve’s index of the dollar’s value against a basket of currencies has risen 37% in the last 12 years, a huge handicap for U.S. producers in the domestic and international markets,” said CPA chief economist Jeff Ferry. “The prospect of further increases in U.S. interest rates could drive the dollar even higher in the coming months. Our new Currency Misalignment Monitor enables us to track overvaluations and undervaluations on a monthly basis so policymakers can see how misaligned currencies are distorting trade flows and domestic production around the world.”
To read more about the methodology, see CPA’s full economic report on the CMM here.