[OPE-L] IMF warns of abrupt dollar fall

From: Alejandro Valle Baeza (valle@SERVIDOR.UNAM.MX)
Date: Wed Oct 31 2007 - 15:34:10 EDT

IMF warns of abrupt dollar fall
By Eoin Callan in Washington 

Financial Times published: October 22 2007 20:03 | Last updated: October 22 2007 20:03

The dollar hit a record low against the euro on Monday as Rodrigo Rato, managing director of 

the International Monetary Fund warned that the US currency could suffer a dramatic fall 

that would shake confidence in American assets. 

The outgoing IMF managing director said the depreciation of the dollar had been orderly, but 

cautioned there was a risk of a runaway sell-off that would hit growth in major economies.

The risks of a disorderly fall in the US currency appeared to increase over the weekend 

after the IMF failed to agree internal reforms that would have set the stage for it to take 

on a greater role managing global economic imbalances.

"Up to now, movements in exchange rates have been orderly and in line with fundamentals. But 

there are risks that an abrupt fall in the dollar could either be triggered by, or itself 

trigger, a loss of confidence in dollar assets," Mr Rato said. 

Hank Paulson, US Treasury secretary, said the IMF needed to press on with efforts to make 

its surveillance of member country exchange rate policies more effective, adding it was a 

"defining issue" for the fund.

"IMF staff need to roll up their sleeves, undertake thorough analysis and put forward their 

judgments. Without meaningful exchange rate surveillance, governance and management, reform 

will ring hollow," he said.

Mr Paulson joined finance ministers from the Group of Seven most advanced economies at the 

weekend in urging China to let its renminbi appreciate more rapidly.

Some policymakers also expressed concern that the fall in the value of the US dollar was 

being disproportionately absorbed by currencies such as the euro and Canadian dollar, rather 

than Asian currencies, including the renminbi. 

Mr Rato warned that this trend could hamper growth and fuel support for populist economic 

policies in these countries, adding that the global economy could be at an "inflection 


He said there was "a risk that exchange rate appreciation in countries with flexible 

exchange rates - including the euro area - could hurt their growth prospects, and that in 

these circumstances protectionist pressures could worsen". 

The managing director called for governments to implement policy actions in order to reduce 

global current account imbalances and not rely on exchange rates to achieve the adjustment. 

But the fund suffered a setback to its efforts to facilitate such understandings between 

governments after members failed to agree a formula to give more say in the IMF to 

fast-growing economies. 

The dollar hit a record low of $1.4348 against the euro, before climbing slightly, while 

sterling also rose as high as $2.0537 against the US currency. Japan's yen hit a six-week 

high of Y113.27 against the dollar. 

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