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Dollar still stronger than it might be, IMF says

Section: Daily Dispatches

By Lesley Wroughton
via The Guardian, London
Thursday, March 6, 2008

WASHINGTON -- The euro's rise has put it on the "strong side" on a medium-term basis but the U.S. dollar's value still needs to come down despite its recent decline, the International Monetary Fund said on Thursday.

Just a few months ago the IMF said the euro's exchange rate was broadly in line with medium-term fundamentals.

The euro hit a fresh record high against the U.S. dollar on Thursday after the European Central Bank decided to hold its key interest rate steady at 4.0 percent. The currency hit a high of $1.5372 Thursday morning and was only marginally below that in early afternoon trading.

"Our view now is that after the appreciation it is now on the strong side in relation to its medium-term fundamentals ... in relation to its broad trading partners," IMF spokesman Masood Ahmed told a news briefing.

He said the dollar's decline had brought the U.S. currency closer to its fundamentals "but it remains within that framework still on the strong side," adding: "Our view on the dollar hasn't changed. ... The depreciation of the dollar in terms of its multilateral real effective exchange rate has brought it much closer to its fundamentals but it remains within that framework still on the strong side."

He also pointed at China, saying the lack of adjustment in currencies of several economies with inflexible exchange rate regimes and large current account surpluses has "not been supportive of the global adjustment."

Ahmed said while the Chinese renminbi has appreciated in real effective terms against the dollar, it remains "substantially undervalued." Allowing the currency's value to rise would help keep domestic inflation pressures in China in check, he said.

Consumer inflation in China hit an 11-year high of 7.1 percent in January prompting concerns that price pressures could spread.

Turning to ECB monetary policy, Ahmed said risks to inflation in the euro area were increasing but should subside.

Therefore, the decision by the ECB Thursday to keep rates on hold was appropriate, he added.

"Our view is that ECB has appropriately kept interest rates on hold but should stand ready to respond flexibly if downside risks to growth moderate the risk to inflation," he said.

Annual inflation in the 15-nation region hit a record higher of 3.2 percent in January and February dampening expectations that the ECB would follow other central banks and loosen monetary policy.

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