Departing managing director Rodrigo de Rato says there could be damage to European economies
BARRIE MCKENNA
WASHINGTON — International Monetary Fund chief Rodrigo de Rato has done what the Group of Seven would not: Issue a dire warning about the economic fallout of the faltering greenback.
A much weaker U.S. dollar, which briefly touched a new low against the euro yesterday, could inflict economic damage on other countries, including much of Europe, said the Spaniard, who is in his final week as IMF managing director.
Mr. de Rato, like many analysts, is now wondering just how low the dollar can go without laying waste to other economies.
“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,” Mr. de Rato told the IMF’s board of governors.
Mr. de Rato also raised the spectre of a protectionist backlash in Europe if the slide isn’t halted soon.
“There is a risk that exchange rate appreciation in countries with flexible exchange rates – including the euro area – could hurt their growth prospects, and that in these circumstances protectionist pressures could worsen,” he said on the final day of the annual meetings of the IMF and the World Bank.
Over the weekend, U.S. Treasury Secretary Henry Paulson stymied European efforts to address the weak dollar in a joint statement from the G7 leading industrialized nations.
On the other hand, the communiqué called on China to speed up the appreciation of the yuan – the only currency named specifically. The finance ministers and central bankers from the U.S., Japan, Germany, Britain, Canada, France and Italy also agreed to keep a close eye on exchange markets and to “co-operate as appropriate.”
For his part, Mr. Paulson reiterated the U.S. mantra that “a strong dollar is in our nation’s interests,” adding that the currencies should be set by free markets.
“The weaker dollar is a major concern because it makes European goods and services more expensive to Americans, and many European policy makers are concerned that the currency will slow euro zone growth,” said economist Ryan Sweet of Moody’s Economy.com.
In his speech, Mr. de Rato did not mention the Canadian dollar, which has appreciated much more rapidly against the U.S. dollar than the euro in recent months.
On Sunday, Bank of Canada Governor David Dodge argued that the latest spike in the loonie was “abnormally” fast and not justified by economic fundamentals. The Canadian currency hit parity with the greenback Sept. 20 for the first time since 1976.
The loonie and the euro both retreated against the U.S. dollar yesterday.
The Canadian dollar fell to $1.02 (U.S.), down 1.55 cents from Friday’s official Bank of Canada close. The fall was attributed to weaker commodity prices.
The loonie is up 19 per cent against the U.S. dollar so far this year, and 65 per cent since 2002, when it slipped below 62 cents. It’s also up substantially against the euro and the yen, making life tough for exporters.
Mr. de Rato is slated to leave office Nov. 1, two years before the end of his contract. He’ll be succeeded by Dominique Strauss-Kahn, a former French finance minister.
Former U.S. Federal Reserve Board chairman Alan Greenspan also expressed concern over the weekend about the dollar’s slide, saying there’s growing aversion among foreigners to buy U.S. securities.
“Obviously there is a limit to the extent that obligations to foreigners can reach,” Mr. Greenspan said in a speech in Washington. The dollar’s decline to its lowest since 1997 may be “an indication America is approaching this limit.”
Mr. Greenspan’s warning came after the U.S. Treasury reported last week that international investors sold a record amount of U.S. stocks, bonds and other financial assets in August. Central banks and private funds have been turning to currencies including the euro.
Total overseas holdings of U.S. equities, notes and bonds fell a net $69.3-billion in August after an increase of $19.2-billion in July.
