Wednesday, April 19, 2006


Let US Dollar Fall: IMF

The IMF has a report out today calling for a lower US dollar. "Restoring balance to the world economy will require shifts in global demand and exchange rates, and governments must not stand in the way of the process, the International Monetary Fund said on Wednesday. The IMF renewed a warning about the threat posed by trade distortions, saying a fall in the dollar and a rise in some Asian currencies is one prerequisite to resolving them."

"IMF chief economist Raghuram Rajan later said while the fund was not urging a weaker dollar, it was pressing governments to remove rigidities in foreign exchange markets."

"'I'm not asking for a depreciation of the dollar by any means,' he told a news conference. 'Exchange markets do what they do. What is important is to allow them to do what they do, which is to remove rigidities in areas where those rigidities exist so that exchange rates can support the adjustment,' he added."

"The fund lamented the lack of action to tackle this risk, citing only 'modest signs' of improvement in U.S. savings, limited adjustments in exchange rate policies in emerging Asia, and more room for reforms in the euro zone and Japan. 'An orderly resolution of global imbalances will require measures to facilitate a rebalancing of demand across countries and a realignment of exchange rates over the medium term,' the IMF said, saying this means the U.S. dollar would need to fall significantly as currencies in surplus countries, such as some in Asia and oil producers."

"'The longer the adjustment is delayed, the larger these exchange rate adjustments will ultimately need to be and the greater the risk of overshooting,' it added."

"Energy prices were also a growing peril, the fund said. 'Looking ahead, limited excess capacity in the oil sector is likely to persist well beyond 2006 and prices will continue to be susceptible to geopolitical events,' the fund said."

"Economists are uncertain how the massive shortfall in the U.S. current account, the broadest measure of trade and investment flows, will resolve itself. The IMF suggested the imbalances could be resolved through a private-sector led adjustment without government action, a process that would see U.S. private savings rise gradually as interest rates increase and the housing market slows, accompanied by exchange rate adjustments."

"A more abrupt and disorderly unwinding could spark a messy dollar slide, a larger increase in interest rates and a sharp economic contraction or recession."

from what I've read, a fall in the dollar will have little impact short-term on the trade deficit. the problem is a structural one and probably won't be solved until we just don't buy goods beacsue of a recession.
It will add fuel to the fire for inflation, though, given that we import everything.

p.s.: Gold at $640!
"I'm not asking for a depreciation of the dollar by any means," he told a news conference. "I'm just suggesting that all other assets appreciate in value as compared to the dollar."
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