by Win Thin
US Treasury Secretary Geithner broke down the world’s currencies into three groups: 1) currencies that are undervalued “by any measure”, 2) EM countries that have flexible currencies under what could be called a “dirty float”, and 3) the major currencies, which he viewed as “roughly in alignment” now. US officials are reportedly pushing for a set of global “norms” on exchange rates along with a move towards standards for “sustainable” trade accounts. This would presumably require those countries with current account surpluses and undervalued currencies to allow greater currency strength as a way of correcting global imbalances.
Using OECD measures of PPP, one finds that INR is about 165% undervalued, THB, PHP, and TWD all about 75% undervalued, and CNY about 70% undervalued. So a case could be made for those four to be put in group 1 along with CNY. However, INR does not draw much attention because India remains a current account deficit country. The other three in Asia are surplus countries with very undervalued currencies, which would naturally draw the attention of US officials calling for a rebalancing of global growth.
Group 2 would then likely consist of the other major EM currencies such as MYR (55% undervalued via OECD PPP), MXN (49%), IDR (48%), CLP (47%), PLN, RUB, HKD (all three 42%), and Korea (41%). In group 2, some are not significantly undervalued at all, including ILS (0%), Brazil (8%), and Singapore (19%), though many of the Asian countries could come under criticism for running current account surpluses along with a fairly undervalued currency and could thus be classified as part of Group 1.
The fact that Geithner viewed Group 3 as “roughly in alignment” means that he does not see a problem with the dollar vs. the majors, but sees misalignments in EM and is thus looking for greater currency strength in EM FX. Still, it seems to be a bit of a stretch to look for some sort of unified currency policy to come out of G20. It’s hard enough to get any sort of consensus in G7, and so adding a bunch of EM countries to the mix with different utility functions regarding exchange rates suggests that any coordination is unlikely to yield any sort of workable solution. Instead, we believe countries will continue to take unilateral actions to optimize their own exchange rates, with little regard for the effects on other countries. Global currency coordination and correcting global imbalances are a process that will take years, if not decades.
Win Thin | Global Head Of Emerging Markets Strategy