Cline and Williamson present estimates of the fundamental equilibrium exchange rates (FEERs) of leading advanced and emerging-market economies: The US dollar remains significantly overvalued against a number of Asian currencies, most prominently the Chinese renminbi and, to a lesser extent, the Japanese yen. The euro and the pound are overvalued on a multilateral basis but have not overshot greatly against the dollar; the depreciation in their multilateral exchange rates should come largely from the appreciations of a number of Asian currencies if it is to contribute positively to the adjustment process. The Asian currencies that should appreciate most are the Singapore dollar, the Chinese renminbi, the Malaysian ringgit, the New Taiwan dollar, and the Japanese yen.
The authors estimate the misalignment of currencies in 30 economies and find the set of exchange rates against the dollar needed to correct all these misalignments simultaneously. The estimates of misalignments are based on a set of current account targets that do not in general exceed 3 percent of GDP, whether deficits or surpluses. Adjustments needed to reach these targets are translated into needed exchange rate realignments using Cline's symmetric matrix inversion method (SMIM) model. This model is explained in detail in Working Paper 08-6 by Cline.
See also the update to this policy brief, 2009 Estimates of Fundamental Equilibrium Exchange Rates.