Cline and Williamson present estimates of the fundamental equilibrium exchange rates (FEERs) of leading advanced and emerging-market economies: The US dollar remains significantly overvalued against a number of Asian currencies, most prominently the Chinese renminbi and, to a lesser extent, the Japanese yen. The euro and the pound are overvalued on a multilateral basis but have not overshot greatly against the dollar; the depreciation in their multilateral exchange rates should come largely from the appreciations of a number of Asian currencies if it is to contribute positively to the adjustment process. The Asian currencies that should appreciate most are the Singapore dollar, the Chinese renminbi, the Malaysian ringgit, the New Taiwan dollar, and the Japanese yen.
The authors estimate the misalignment of currencies in 30 economies and find the set of exchange rates against the dollar needed to correct all these misalignments simultaneously. The estimates of misalignments are based on a set of current account targets that do not in general exceed 3 percent of GDP, whether deficits or surpluses. Adjustments needed to reach these targets are translated into needed exchange rate realignments using Cline's symmetric matrix inversion method (SMIM) model. This model is explained in detail in Working Paper 08-6 by Cline.
See also the update to this policy brief, 2009 Estimates of Fundamental Equilibrium Exchange Rates.
View full document [pdf]
Working Paper 13-2: The Elephant Hiding in the Room: Currency Intervention and Trade Imbalances March 2013
Policy Brief 12-25: Currency Manipulation, the US Economy, and the Global Economic Order December 2012
Working Paper 12-19: The Renminbi Bloc Is Here: Asia Down, Rest of the World to Go? October 2012
Policy Brief 12-19: Combating Widespread Currency Manipulation July 2012
Policy Brief 12-7: Projecting China's Current Account Surplus April 2012
Working Paper 12-4: Spillover Effects of Exchange Rates: A Study of the Renminbi March 2012
Op-ed: Taxing China's Assets: How to Increase US Employment Without Launching a Trade War April 25, 2011
Op-ed: Why the World Needs Three Global Currencies February 15, 2011
Policy Brief 10-24: The Central Banker's Case for Doing More October 2010
Policy Brief 10-26: Currency Wars? November 2010
Congressional Testimony: Correcting the Chinese Exchange Rate September 15, 2010
Op-ed: New Imbalances Will Threaten Global Recovery June 10, 2010
Article: The Dollar and the Deficits: How Washington Can Prevent the Next Crisis November 2009
Policy Brief 09-21: The Future of the Dollar September 2009
Policy Brief 09-20: Why SDRs Could Rival the Dollar September 2009
Policy Brief 07-4: Global Imbalances: Time for Action March 2007
Working Paper 11-14: Renminbi Rules: The Conditional Imminence of the Reserve Currency Transition September 2011
Peterson Perspective: Legislation to Sanction China: Will It Work? October 7, 2011