IMF chief warns dollar may suffer 'abrupt fall'

FE Team | Published: October 24, 2007 00:00:00 | Updated: February 01, 2018 00:00:00

WASHINGTON, Oct 23 (AFP): The head of the International Monetary Fund, Rodrigo Rato, warned yesterday of a potential "abrupt fall" in the US dollar that could roil the global economy.
"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," Rato said at the close of annual meetings here of the IMF and the World Bank.
The outgoing IMF managing director spoke here as the European single currency hit a new high of 1.4347 dollars and global equity markets plunged amid renewed fears a US credit crunch could pitch the world's biggest economy into recession.
"The uncertainty ... comes from downside risks that are much higher than they were six months ago. The turbulence in the credit markets is a warning that we cannot take the benign (global) economic environment of recent years for granted," Rato said on the final day of the annual meetings of the IMF and the World Bank.
"We still do not know the full effects of the decline in the housing market and the subprime problems of the US economy. Further disruption in financial markets and further falls in housing prices could lead to a global economic downturn," he said.
A crisis in the risky US subprime mortgage sector, where loans are given to homebuyers with poor credit histories, erupted this year as borrowers defaulted on mortgages amid rising interest rates and a sharp slump in US housing prices.
The credit woes spilled into global financial markets and roiled stock markets worldwide in August. Although markets have recovered somewhat, the uncertainties of the extent of the problems are plaguing investors.
US Treasury Secretary Henry Paulson, addressing the plenary
session of the 185-nation twin financial institutions, also sounded a note of caution.
"We need to continue to be vigilant, because all of our capital markets are not yet functioning normally," Paulson said.
Rato warned that a global slowdown would exacerbate other existing risks, noting emerging economies' reliance on private capital inflows which are expected to reach a record 620 billion dollars this year, after a 2006 total of 573 billion, according to the Institute of International Finance.
"Some emerging economies that have relied on external financing to fund large current account deficits could be tipped into crisis by a combination of reduced demand for their exports and tighter financial market conditions," the IMF chief said.
He urged the governors of the IMF, which has a core mission of fostering global financial stability, to take action to avert a calamitous downturn.
"All of these risks make action on already agreed policies more urgent," said the former Spanish finance minister, who is stepping down nearly two years before the end of his five-year mandate.
His successor, Dominique Strauss-Kahn, a former Socialist finance minister of France, takes office on November 1.
Rato also appeared to suggest that Europe may take steps to temper the strong appreciation of the euro, which is weighing on exports from the 13- nation bloc.
"There is 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," he said.
Nevertheless, in an apparent reference to recent pressures from France and other eurozone members on the European Central Bank to curb the euro, Rato said: "Policymakers need to respect the independence of central banks and support their vigilance on inflation."