IMF Chief Says Dollar Has Room to Fall

IMF Chief Says Dollar Has Room to Fall

By BOB DAVISOctober 15, 2007 8:48 p.m.

WASHINGTON -- After a week of saying the dollar had fallen too far recently, International Monetary Fund chief Rodrigo de Rato now says the dollar has more room to fall over the next several years.

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.
Mr. de Rato first said the dollar had fallen too far last week in an interview with the Financial Times. He repeated that in Madrid and in a session with The Wall Street Journal. He said he was referring to the decline of the dollar compared with a "weighted" average of currencies over the past several years. The dollar gained slightly against the euro after his remarks.

Mr. de Rato's comments set off a series of meetings within the IMF as it struggled to get its message straight before Friday's meeting of finance ministers from the Group of Seven industrialized nations: Canada, France, Germany, Italy, Japan, the United Kingdom and the U.S. The alignment of global currencies is likely to be discussed in the wake of the global credit crunch and U.S. interest-rate cuts.

Mr. de Rato is especially under scrutiny. His remarks about the dollar being undervalued could look as if he were siding with European officials who worry that the strength of the euro, compared with the dollar, is undermining European exporters. Many in the Spanish media speculate that Mr. de Rato, a former Spanish economy minister who is resigning at the end of this month, is gearing up to run for prime minister. Mr. de Rato denies that he will seek office in Spain.
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."