IMF tells financial leaders to 'stop the squabbling'

Squabbling over exchange rate policy between the major economic blocs could trigger a global financial crisis, the International Monetary Fund (IMF) warned yesterday.

Squabbling over exchange rate policy between the major economic blocs could trigger a global financial crisis, the International Monetary Fund (IMF) warned yesterday.

In a thinly-veiled warning to the United States, Europe and Japan, the world's leading financial regulator urged leaders to work together to smooth the global imbalances that threaten to wreck the nascent economic recovery.

The plea came as the pound surged to a 14-month high against the euro on mounting speculation that the Bank of England was poised to raise interest rates.

In its twice-yearly review of financial stability, the IMF said markets were in a "sweet spot", with economic growth and corporate earnings rebounding and inflation and interest rates at historic lows.

But it warned financial markets were vulnerable to higher interest rates and shocks from global imbalances, particularly the US current account deficit that could unwind suddenly.

The report was published just a fortnight before finance ministers from the Group of Seven (G7) countries - the US, Britain, Canada, France, Germany, Italy and Japan - meet during the IMF's spring conference in Washington.

Their last two meetings have been dominated by the fall in the dollar over the past two years as the economic powers have squabbled over who should taken responsibility for absorbing the impact of rebalancing the global economy.

The US currency has fallen as markets realised America's twin current account and trade deficits were unsustainable without a realignment in global exchange rates.

So far the US has presided over a gentle devaluation. A more substantial fall has been prevented by the eagerness of Asian banks to prop up the dollar by buying US assets to prevent their currencies appreciating too quickly.

In yesterday's report the IMF said market participants still expected the adjustment to be "orderly". "If this delicate balance were to be impaired the dollar could weaken more pronouncedly," it said.

"At any sign of risk materialising, foreign investors could demand a risk premium on their dollar assets. This ... could create headwinds to the economic recovery."

Meanwhile, the pound rose to a 14-month high against the euro as speculation mounted that the Bank's monetary policy committee (MPC) would raise rates tomorrow.

The pound rose as high as 65.19p, its highest since February 2003. The rise highlights the dilemma faced by the MPC, which must balance the needs of an industry hurt by a strong pound with the inflationary threat of a booming housing market.