Tags: IMF | Warns | Growing | Risks | Welcome | Weaker | Dollar

IMF Warns of Growing Risks, Would Welcome Weaker Dollar

Friday, 18 Feb 2011 07:23 AM

The International Monetary Fund warns global finance ministers of growing risks to the world economy, from surging food prices and public finances while also advocating a somewhat weaker dollar.

The IMF's report to a two-day meeting of the Group of 20 points to rising bond yields as a key risk to the U.S. fiscal outlook and global growth, and said the eurozone 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 under way, posing a problem to policymakers 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 report, 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 towards a level more consistent with medium term fundamentals, helping to support more balanced growth," the report said.

The IMF, under director Dominique Strauss-Kahn, 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 eurozone countries pose "significant risks to recovery in the region and possibly beyond," and called on eurozone policymakers 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 eurozone bailout fund (EFSF) aren't 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.

© 2015 Thomson/Reuters. All rights reserved.

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