Tuesday, October 16, 2007

The IMF Believes The US Dollar Still Has Some Downside Left

The excerpts below are from a WSJ article concerning the IMF’s view of the US dollar. The question that I have is that the US Treasury says it is interested in a strong dollar, but little is done to maintain its value. The text in bold is my emphasis.

Over the "medium term," which is three to five years in IMF parlance, "we still see room for further depreciation," Mr. de Rato said.

The euro, he said, is "very near" its equilibrium value. At a breakfast with reporters yesterday, Mr. de Rato repeated his remarks that the dollar's drop had been "quite substantial." However, he then added his projection that the dollar still had room to fall. IMF officials say his remarks were meant to more accurately convey the fund's view of the dollar and didn't reflect any pressure from the U.S. Treasury or European finance ministries. "There's still some depreciation to come in the medium term," said the fund's chief economist, Simon Johnson.

Mr. de Rato's clarification underscores the difficulty that even experienced financial officials have in dealing with questions of currency. U.S. Treasury officials consistently say they favor a strong dollar, but they do nothing to defend the currency as it falls in value. They declined to comment on the issue.

In effect, the U.S. government depends on a steady decline of the dollar to narrow the nation's current-account deficit. If that deficit remains too wide, many economists worry, it could ultimately lead to a crash in the dollar.

The U.S. and Europe also have been pushing China to let its currency rise in value against both the dollar and euro as a way to minimize "global imbalances" and give a lift to U.S. and European exporters. Mr. de Rato repeated the IMF's view that the yuan "should have more flexible movement," which he said was in China's interest because it would "allow for strong growth and strong domestic consumption."

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