November meetings of leaders from the Group of 20 industrialized nations may not have had exchange rates on the agenda, but the notes prepared by the International Monetary Fund included some meaty foreign exchange references.
The first is the view that although the dollar has moved closer to medium-term equilibrium it “still remains on the strong side”. The second is the (widely held) view that the dollar “is now serving as the funding currency for carry trades” which has contributed to upward pressure on the euro.
The third was the acknowledgement that the Chinese renminbi has depreciated in real effective terms and remains significantly undervalued from a medium-term perspective. To deal with the latter the IMF prescribed the usual recipe; namely that “exchange rate appreciation would help limit capital flows” and “facilitate a shift towards domestic consumption that is needed in many emerging economies, notably those with large external surpluses”.
None of the points put forward by the IMF on foreign exchange are ground breaking. However, the fact that the IMF judged it appropriate to outline these issues ahead of the G20 meetings is suggestive of the economic and thus political relevance of these issues. China’s exchange rate peg is clearly at the forefront of these issues.