The IMF said Thursday that the dollar was overvalued on currency markets and reiterated its view that China’s yuan remains "substantially overvalued". The issue of imbalances has sparked fears globally of currency wars.

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AFP - The International Monetary Fund on Thursday said the dollar was overvalued on currency markets, while the euro, yen and pound were in line with fundamentals.

"The real effective exchange rates of Japan, the euro area, and the UK all appear broadly in line with medium-term fundamentals, while the US dollar is on the strong side of fundamentals," the IMF said in a report to the Group of 20 economic powers.

The IMF noted that recent government interventions in the foreign-exchange market had contributed to the imbalance, which has sparked fears of "currency wars" to protect exports amid the global economic recovery.

"While advanced economies have generally avoided intervening in currency markets, some have intervened more recently to limit rapid appreciations, contributing to the above-mentioned tension on this issue."

The IMF reiterated its view that China's currency, the yuan, remained "substantially undervalued."

The IMF prepared the report for a G20 meeting of financial ministers and central bank governors in South Korea on October 22-23, in preparation for a G20 summit in mid-November.

Since then the dollar has been relatively stable. The US currency had weakened sharply between mid-September and mid-October amid expectations that the Federal Reserve would restart major large-scale asset purchases to support a flagging recovery, effectively printing money.

In a final statement the G20 finance chiefs agreed to "refrain from competitive devaluation of currencies" and aim for "more market-determined exchange rate systems."

The IMF was empowered to police the agreement, which however lacks teeth in the absence of numerical targets for countries such as China to lower their swollen trade surpluses.

The IMF noted tensions among the G20 developed and developing members stemming from currency imbalances in part propelled by large capital inflows to fast-growing emerging economies as investors seeking higher-yielding returns.

Key emerging surplus economies, notably in Asia, have responded to the capital inflows by intervening in foreign-exchange markets to accumulate reserves and limit currency appreciation, the Washington-based institution said.

Those actions were contributing to "continuing significant exchange rate misalignments relative to fundamentals -- for instance, the Chinese reminbi remains substantially undervalued."

Meanwhile, some other emerging economies, notably South Africa and countries in Latin America, have allowed their currencies to appreciate "substantially," boosting real-effective exchange rates to levels that appear increasingly overvalued, it warned.

"The significant cross-country differences in the extent of de facto exchange rate flexibility and the limited scope for policy responses in countries receiving large inflows is stirring some tension across G20 members," the 187-nation IMF said.

The United States, burdened with a massive trade gap with China, is the leading critic of Beijing's currency policy. Washington accuses China of keeping the yuan undervalued to make its exports cheaper and gain an unfair trade advantage.

However, many emerging markets including China suspect that the United States is deliberately allowing the dollar to flounder on currency markets so that it can export its way back to prosperity.

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