Dollar Is Increasingly Overvalued as Deficit Widens, IIF Says

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The dollar has become increasingly overvalued thanks to a swelling U.S. current-account deficit, according to the Institute of International Finance.

China’s yuan is the mirror image, becoming increasingly undervalued, the IIF found in a periodic assessment of exchange-rate misalignments.

“The biggest surprise is that U.S. dollar overvaluation has grown since our November 2020 update, even though the dollar has fallen,” Robin Brooks, the IIF’s chief economist, wrote in a March 4 report. “The offset to this overvaluation is China, where the renminbi is substantially undervalued.”

Dollar Is Increasingly Overvalued as Deficit Widens, IIF Says

The “aggressive” deployment of fiscal stimulus in the U.S. has helped boost its economic growth prospects, in turn widening the country’s current-account deficit, Brooks wrote.

IIF modeling indicates the dollar is 11.7% overvalued, compared with 10.2% in the November analysis, while China’s yuan -- also known as the renminbi -- is 12.8% undervalued, slightly less than the 13.4% last time.

Brazil’s real is some 18.6% undervalued in the latest tally, while the Russian ruble’s shortfall from fair value is 13.9%, according to the IIF.

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