Slide in dollar could jeopardise rapid global recovery, warns IMF

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The Independent Online
A RAPID slide in the dollar could undermine US and world economic growth, the International Monetary Fund warned yesterday.

Its comments came as the Fund, headed by Michel Camdessus, proclaimed a rapid global economic recovery from the economic and financial problems of last year, with healthy growth for this year and next. But it also noted the risks, one of which was a hard landing in the US as its trade imbalances mount.

"Over the medium term, the dollar does need to correct downwards," the IMF's chief economist, Michael Mussa said, unveiling the Fund's "World Economic Outlook". Against the euro, it needs to reverse its gains of the last year "and a little bit more than that", he said. But this correction should not be too quick. And against the yen, it has already depreciated and a further rapid slide could cause problems for the US and Japan.

"Further significant appreciation of the yen would represent overshooting," Mr Mussa said, adding that intervention in foreign exchange markets would work if backed by the correct monetary policy.

His comments come as officials from the Group of Seven leading industrialised states gather for a meeting this weekend in Washington ahead of the annual meetings of the IMF and World Bank. The subject of the yen's rise, and the case for concerted intervention, will be high on their agenda.

The dollar was one of the issues which the IMF identified as threats to the US recovery, which has accounted for half of all the increase in global demand growth in the last year. America is predicted to grow 3.7 per cent this year and 2.6 per cent next, 0.4 percentage points more rapidly than expected in the Fund's last projection in both cases.

The IMF said that US interest rates might need to rise once more this year and perhaps again next year, and it cautioned the US Congress against tax cuts which could fuel inflation. It also identified the stock market as a source of possible concern.

The world economy as a whole is expected to expand by 3 per cent this year, 0.7 per cent faster than foreseen in May, and by 3.5 per cent next. The cause of the expanded growth projections lies in a much more rapid recovery in East Asia than had been expected, with the exception of Indonesia. Growth for the Newly Industrialised Asian economies is revised up from 2.1 to 5.2 per cent this year, while Japan's growth is set at 1 per cent, compared with an expected contraction. Russia, too, is seeing a turnaround, with the last projection of a 7 per cent contraction revised to no growth with a return to expansion next year.

Britain's economic performance is lauded, with the bank of England praised for "skillful management". The soft landing has set the trend for growth of 1.1 per cent this year and 2.4 per cent next, the Fund said. Inflation is expected to remain mild, below the target of 2.5 per cent, while unemployment will gradually increase to 5.3 per cent next year.