Dollar tumbles after IMF warning
BY LEA PATERSON, ECONOMICS EDITOR
FEARS of a slump in the dollar were reignited yesterday by a strongly worded
warning from the International Monetary Fund (IMF) that sent the US currency
tumbling on the foreign exchanges. The dollar dropped to its lowest level in
almost four months against the euro, and also lost ground against the yen and
the pound, after the IMF said that America’s ballooning current account
deficit had put the currency at serious risk. The influential institution
argued that the US economic outlook was highly uncertain, unnerving a market
that was already pessimistic about the prospects for an American bounceback.
The IMF urged the Federal Reserve to stand ready to cut interest rates again,
and highlighted America’s record-breaking current account deficit as a key
risk in the months ahead. “Directors (of the IMF) indicated that the size of
the US external current account deficit did not appear sustainable in the
longer term,” the institution’s annual assessment read. “It (the deficit)
raised concerns that the dollar might be at risk for a sharp depreciation,
particularly if productivity performance remained disappointing.” The report
welcomed President Bush’s recent tax cut as “appropriate and timely”, but
gave warning that the cost of the programme could easily exceed White House
forecasts. The IMF argued that with government expenditure at risk of
overshooting offical targets, the Government ought to be prepared to
reconsider its stance on future tax reductions and spending rises. News of a
marginally better-than-expected July on the US high street, where retail
sales were unchanged, did little to boost the dollar, which weakened as far
as 90.35 cents against the euro. The single currency was also bolstered by a
drop in French and Spanish inflation, which raised hopes of a cut in eurozone
interest rates at the end of the month. Against the yen, the dollar dropped
to a fresh two-month low of Y121.20 in the wake of the IMF assessment, with
the yen benefiting from a modest easing of monetary policy. In an unexpected
move, the Bank of Japan voted to put more money into circulation in an effort
to make the cost of borrowing cheaper. The yen initially weakened on the news
but later reversed these losses on hopes that the move would bolster Japanese
growth. In London, the pound closed little changed against the dollar at
$1.4210, and stayed near Monday’s five-month euro lows. Sterling gained
ground against the dollar in New York trade, rising as far as $1.4280.
