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LONDON, March 7 (Reuters) - Emerging-market currencies have suffered steep falls in recent months but many - such as the rouble and the Brazilian real - still appear overvalued when inflation and the exchange rates of trade partners are factored in.
A comparison of the real effective exchange rates (REER) of a number of currencies shows the Nigerian naira is the most overvalued relative to its 10-year average. The South African rand, Turkish lira and Argentine peso are the most undervalued, the following graphic shows:
REER is the weighted average of a currency against a basket of its trade partners’ currencies and adjusted for inflation. REER is commonly used to determine whether an exchange rate is overvalued or undervalued, and IMF research suggests REERs have been a useful signal of upcoming financial crises in the past.
The naira is 27 percent above its 10-year average, though in nominal terms it is at record lows to the dollar. Similarly, the Russian rouble fell to record lows recently but is still almost 10 percent above its long-term average.
Many currencies appear to have further to fall before their economies become competitive in export markets.
“The rouble is still modestly overvalued. In REER terms, it trades more like the high-quality Taiwan or Singapore currencies, rather than one where capital outflows swamp the current account surplus,” said UBS strategist Manik Narain. “But there is evidence prices are adjusting in India and Turkey.”
The Indian rupee is down 15 percent and the lira is almost 20 percent under its 10-year REER average.
Salman Ahmed, a strategist at Lombard Odier, said the depreciation marked a major difference from the crises of the 1990s, when most emerging currencies were pegged.
“A lot of currencies have moved,” Ahmed said. “This time around, we have flexible currencies which can absorb the shock, and adjustments have gone through.” (Reporting by Sujata Rao; graphic by Vincent Flasseur Editing by Larry King)