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October 24, 2007

IMF Head: "Abrupt Fall" In Dollar Possible Economy

Outgoing IMF head Rodrigo Rato warns that an "abrupt fall" in the US dollar may be in the offing. AFP (via Cryptogon):

The head of the International Monetary Fund, Rodrigo Rato, warned Monday 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. [...]

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. [Emphasis added]

The US dollar is the ground floor of a gigantic house of cards. If it tumbles, the ramifications will be enormous. It may be inevitable, however, as the US has been living beyond its means for years. Print up enough IOUs, and sooner or later people get fed up and say "Enough already."

Posted by Jonathan at October 24, 2007 01:34 PM  del.icio.us digg NewsVine Reddit YahooMyWeb