IMF warns of growing risks, would welcome weaker dollar – Reuters

Posted on February 18, 2011 by


The International Monetary Fund will warn G20 finance ministers this weekend of growing risks to the world economy from surging food prices and public finances while also advocating a somewhat weaker dollar.

The Fund’s report to a two-day meeting starting on Friday, pointed to rising bond yields as a key risk to the U.S. fiscal outlook and global growth, and said the euro zone needed to take more comprehensive steps to deal with an ongoing debt crisis.

The report, entitled Global Economic Prospects and Policy Challenges, warned that a two speed rebound in the world economy is underway, posing a problem to policy makers trying to shore up recovery following the financial crisis.

“The global economic recovery is advancing. However the recovery remains uneven, with downside risks in advanced economies remaining elevated while overheating risks are growing in emerging economies,” it said.

The paper, obtained by Reuters, said the real exchange rates of several emerging economies’ currencies, particularly Brazil and South Africa are “looking increasingly overvalued.”

It said some depreciation of the dollar would help support more balanced world growth and reiterated that China’s yuan was substantially undervalued in real effective terms.

“Some further real effective depreciation of the U.S. dollar would help ensure a sustained decline of the U.S. current account deficit toward a level more consistent with medium term fundamentals, helping to support more balanced growth,” the report said.

The fund raised its forecast for oil prices this year to $94.75 a barrel from a forecast just last month of $89.50, following tensions in the Middle East, and said the social unrest in the area also risked driving up global food prices.

It warned that tensions in peripheral euro zone countries pose “significant risks to recovery in the region and possibly beyond,” and called on euro zone policy makers to adopt a more comprehensive approach to area’s debt crisis.

“This will require decisive action on an expedited basis,” it said, as backstops put in place by the European Central Bank and the euro zone bail out fund (EFSF) are not sufficient.

In advanced economies, high unemployment and large output gaps are keeping wages and inflation in check, notwithstanding large increases in food and energy prices, meaning accommodative monetary policies remain appropriate, the report said.

However, quantitative easing in the United States could result in a flood of capital, it warned, adding that this has not so far been borne out by recent data.

The United States and Japan should both make more progress with medium term fiscal consolidation, it said.