IMF steps up pressure for dollar depreciation

[Alejandro Valle Baeza <valle@xxxxxxxxxxxxxxxx>]

IMF steps up pressure for dollar depreciation
By Krishna Guha and Scheherazade Daneshkhu
Finacial Times Published: April 19 2006 13:58 | Last updated: April 19
2006 21:32

The International Monetary Fund on Wednesday stepped up the pressure for
far-reaching shifts in exchange rates, declaring that the dollar will
have to depreciate “significantly” over the medium term if global
economic imbalances are to be resolved in an orderly fashion.

In its clearest statement to date on this highly-charged subject, the
IMF said it was essential that currencies in Asia and of oil exporters
were allowed to appreciate as part of the required “realignment of
exchange rates”. But it shied away from giving any specific figures as
to the extent of appreciation required.

The statement came in the IMF’s twice-yearly World Economic Outlook,
published on Wednesday, which highlighted global imbalances as the
biggest threat to what was otherwise an “unusually favourable” economic
environment.

It said global growth had been surprisingly robust in late 2005 and
raised its estimates from September for 2006 and 2007 by 0.6 percentage
points and 0.3 points to 4.9 per cent and 4.7 per cent respectively.
This year is set to be the fourth in a row in which global growth has
exceeded 4 per cent.

The IMF sharply increased its estimates for growth in Japan, to 2.8 per
cent this year and 2.1 per cent next, declaring that the expansion there
is now “well-established”. It also raised its forecasts for China and
India significantly, with other increases for oil exporters.

But the IMF remained sceptical on the strength of the rebound in the
eurozone, inching its growth forecast up to 2 per cent this year, but
down to 1.9 per cent next. It said growth remained heavily reliant on
exports, with domestic consumption particularly weak in Germany.

The IMF now sees the US growing at 3.4 per cent this year and 3.3 per
cent next, a little faster this year and slower next than earlier
estimates. It cautioned that a flattening out in US house prices could
have a bigger effect on consumption than some studies show.

It expects the UK economy to recover to 2.5 per cent growth this year,
followed by 2.7 per cent in 2007.

In keeping with the stronger pace of expected global growth, the IMF now
expects consumer price inflation in industrialised economies to remain
at 2.3 per cent this year and ease back only to 2.1 per cent next. It
correspondingly revised up its estimates of short term market interest
rates over the next two years.

The IMF said global financial market conditions “remain very favourable,
characterised by unusually low risk premiums and volatility”. It argued
that a flattening yield curve need not signal a slowdown ahead, though
increased investment - and therefore lower corporate savings - could
push up long term interest rates.

The IMF said this year could prove a “watershed year” in which countries
either capitalised on benign circumstances to address global imbalances,
or spurned the opportunity. Exchange rate shifts would have to be
accompanied by rebalancing of demand across the world, with steps to
increase savings in the US, raise consumption in China, investment in
the rest of Asia and boost productivity growth in the non-tradeable
goods sectors in Europe and Japan.

The World Economic Outlook also cautioned against becoming complacent
about high oil prices. It said consumers may still be treating current
increases as temporary, rather than permanent losses. With excess
capacity low, the market is vulnerable to shocks.

Moreover, it said recent price increases had been driven not by a
surprising strength of demand for oil, but deepening fears about both
short- and long-term supply.