By Yoon Ja-young
Staff Reporter
The International Monetary Fund said the dollar is still overvalued despite recent depreciation against other major currencies and has room for further falls.
``In the IMF staff's view, the dollar remains overvalued relative to medium-term fundamentals,'' the IMF said in its World Economic Outlook released on Wednesday.
It said that although the euro had strengthened in effective terms, it continued to trade in a range broadly consistent with medium-term fundamentals.
While Washington keeps pressure on Beijing to increase the value of Chinese currency, the IMF still believes the dollar's decline is a healthy economic rebalancing and should fall further. But Europeans have complained the euro's highs are affecting exports.
Tensions over currencies come as the United States and other industrial countries push for a bigger role for the IMF in monitoring an orderly operation of global currencies and economic imbalances.
The South Korean won also has strengthened against the dollar and is expected to maintain its strength going forward on globally weak dollar sentiment, currency dealers said. The IMF cut its forecast for South Korea's economic growth to 4.6 percent for 2008, compared with 4.8 percent projected for this year.
It cut its prediction for global economic growth from 5.2 percent to 4.8 percent for next year, citing slowdown in the U.S. economy. IMF's chief economist Simon Johnson, said: ``The world's economy has entered an uncertain and potentially difficult period.''
In particular, it warned that much of that still respectable growth rate would not come from the West. This year, China and India will be responsible for close to half of the growth in the global economy, outstripping contributions from the US and other developed economies for the first time.
While China is still expected to grow by 10 percent next year, hardly affected by recent financial crises, most Western economies have seen reductions in growth forecasts.
Even the subdued growth foreseen by the IMF is threatened by ``the distinct possibility that recent turbulent conditions could continue for some time and generate a deeper credit crunch, with considerably greater macroeconomic impact.''
Noting that property prices in the U.S. have risen by almost a third more than economic fundamentals would imply, the fund said yesterday that overvaluations were ``still larger in a number of other countries, including Ireland, the Netherlands and the United Kingdom.''
``The estimates suggest that a number of advanced economies' housing markets outside the United States could be vulnerable to a correction. There would clearly be a sizeable impact on housing markets in the event of a widespread credit crunch.''
At the IMF, former French finance minister Dominique Strauss-Kahn is waiting in the wings to take over from IMF Managing Director Rodrigo Rato at the end of October, keeping Europeans in top positions at the fund.
Although Rato will host the IMF meeting, Strauss-Kahn will have the opportunity to immerse himself in IMF issues.