WASHINGTON: Large and growing US budget and current account deficits raise the risk of an abrupt drop in the value of the greenback, which could hit US and global economic growth, the International Monetary Fund (IMF) said.
Although the dollars adjustment could occur gradually over an extended period, the possible global risk of a disorderly exchange rate adjustment, especially to financial markets, cannot be ignored, the fund warned in a new report on Washingtons fiscal stance.
An abrupt weakening of investor sentiment vis-a-vis the dollar could possibly lead to adverse consequences both domestically and abroad, particularly since US debts to the rest of the world were at record highs, the fund said.
Charles Collyns, deputy director of the IMFs Western Hemisphere Department, told reporters that the substantial fall of the dollar against the euro and the yen was making it tougher for central banks in the euro zone and Japan to keep nascent economic recoveries on track.
So far the downward movement in the US dollar has been fairly orderly...but already the orderly movement that has occurred has certainly complicated macroeconomic policy management in other countries, such as the euro area and Japan, Collyns said.
The levers they would have to respond to further appreciation of their (exchange) rates are somewhat limited, he said. We are concerned that if the US fiscal problem is not addressed then the problem could become even more difficult.
Nevertheless, Collyns said the fall in the dollar to date against the euro and the yen was unlikely to bring an end to budding economic recoveries.
The fact that the global recovery in general is gathering pace...is also providing substantial impetus to the European and Japanese economies, he said. So, I think, overall, the global economic environment remains quite favourable to continued recovery. Reuters
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