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U.S. dollar starts the big slide against major currencies

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  • #31
    The current downdraft in global markets and commodities has sent many investors running for the perceived safety of U.S. assets. In fact, this so-called flight to safety is not only irrational - given the serious problems in the U.S. economy - but dangerous, exacerbating the very structural imbalances that generate it:

    The U.S. asset Catch-22

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    • #32
      How low will the dollar go?

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      • #33
        U.S. April trade deficit widened 2.5% to $63.4 billion from March

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        • #34
          "...This suggests there is a trend shift away from the dollar....”



          Russia shifts part of its Forex reserves from dollars to euros

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          • #35
            Complete article, original available only to Financial Times subscribers.

            Another day, another bout of jitters on global equity markets. This time round, it seemed to be a rash of hawkish statements from Federal Reserve governors that convinced investors more US rate rises were on the way.

            The extent of the Fed’s anti-inflation rhetoric is such that some analysts are looking beyond this month’s meeting. “We now think that the Fed will raise the funds rate by 25 basis points at the June meeting, and possibly at the August meeting,” says Richard Berner, US economist at Morgan Stanley. “(This) will pose a continued challenge to risky asset markets.”

            That investors were braced for very bad news from the economic data was shown by the release of the US producer price index numbers. Even though the core index rose 0.3 per cent in May, slightly more than expected, equity markets rebounded after the announcement, since even worse had been feared.

            The recent swing in sentiment was shown by Merrill Lynch’s monthly poll of fund managers which found that 61 per cent expected the global economy to slow in the next 12 months, compared with 40 per cent in April. The proportion of managers who are overweight equities has fallen from 66 to 54 per cent in the same period.

            The most dramatic change in sentiment has been in Japan where the Nikkei 225 index is down 17 per cent since May 9 and 11 per cent on the year. Many global investors were caught out by the strength of the Japanese market last year and were forced to chase it this year. It looks as if this “hot money” is being swiftly withdrawn. But the Japanese market’s decline may have a silver lining. It may mean the Bank of Japan will be slower to raise interest rates, which will reduce the potential monetary squeeze on the global economy. Hugh Hendry of the Eclectica hedge fund says the markets are a bit of a paradox just now. Many investors are worried about inflation – but they are too early. He believes the US economy is about to have a sharp slowdown that will cause the Fed to slash interest rates. That may cause inflation in the long run but will be hugely beneficial for Treasury bonds in the short term.

            The Short View: Braced for very bad news

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            • #36
              The gossip on new U.S. Treasury Secretary Henry Paulson says he only took the job after being promised a role in shaping policies. While Paulson is respected, and his international connections might help with such issues as revaluing the Chinese yuan, it's doubtful whether he can, or will, reverse the fall of the dollar:

              Paulson and the dollar

              The U.S. Treasury has not been performing at its best in the past six years. Enter Hank "the Hammer" Paulson, fresh from Goldman Sachs, ready to tackle the challenges facing the world's biggest economy. He will find that the greatest of those challenges lie not in Beijing, Moscow or Caracas, but at home in the U.S.:

              America's untested management team

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              • #37
                The Bush Tax cuts of 2001 has been spilling its magic on the country --- it has generated over $2 trillions, the size of China's economy.

                The deficit has stayed below prediction and the federal and state governments are awash with tax dollars. Were it not for the 9/11 and the Iraq war, the economy might be grinding to greatness in style.
                THERE IS NO SALVATION IN RELIGION.

                "Unless you are 'born' again, you can never get into the kingdom of God" (John 3:3).

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                • #38
                  Another Mission ‘Accomplished’



                  The release of the White House midsession budget review is an annual event normally marked by a few wonkish observations and the routine updating of various spreadsheets, not by a full-dress presidential dog-and-pony show. But President Bush plans to preside today, with members of Congress and invited guests in attendance. By all indications, including his own in his weekly radio address last Saturday, he plans to turn this into a celebration — just in time for the fall campaign.

                  This is proof, if anyone still needs it, that this administration is desperate for something to boast about. On Mr. Bush’s watch, triple-digit budget surpluses have turned into annual triple-digit budget deficits. There’s no information in the midsession report to alter that utterly dispiriting fact. Yes, the report is expected to project that this year’s deficit will be somewhat less gargantuan than last year’s — probably somewhere between $280 billion and $300 billion, versus a $318 billion shortfall in 2005. That’s not much to crow about.

                  But Mr. Bush is likely to gloat, anyway. Earlier this year, the administration conveniently projected a highly inflated deficit of $423 billion. With that as a starting point, the actual results can be spun to look as if they’re worth cheering.

                  The razzle-dazzle won’t end there. As he did in his remarks on Saturday, Mr. Bush is sure to use today’s event to credit tax cuts for a projected “surge” in tax revenue. The Treasury is expected to take in about $250 billion more in 2006 than in 2005, for a total take of $2.4 trillion. Devoid of context, the number looks impressive.

                  In fact, it is $100 billion less than the $2.5 trillion revenue estimate the administration touted when it set out in 2001 to sell its policy of never-ending tax cuts. Even with this year’s bigger haul, real revenue growth during the Bush years will be abysmal, averaging about 0.3 percent per capita, versus an average of nearly 10 percent in all previous post-World War II business cycles. That might be excusable if the recent revenue improvements could reasonably be expected to continue. They cannot. Much of the increase in tax receipts is from corporate profits, high-income investors and super high-earning executives, sources that are just as unpredictable as the financial markets to which they’re inevitably linked.

                  So, the revenue surge is neither a sign that the tax cuts are working nor of sustainable economic growth. A growing number of economists, most prominently from the Congressional Budget Office, point out that upsurges in revenue are also the result of growing income inequality in the United States, an observation that is consistent with mounting evidence of a rapidly widening gap between the rich and everyone else. As corporations and high- income Americans claim ever more of the economic pie, revenues rise, even if there’s no increase in overall economic growth.

                  If Mr. Bush looked behind his headline numbers, he, too, could see that the rich are getting richer while the rest are, at best, only holding ground. It would make sense to use some of the windfall revenue to enact policies and programs that tilt against growing inequality. Unfortunately, he’s flogging more tax cuts that will deepen the divide.

                  Bush touts fourth-largest deficit in U.S. history

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                  • #39
                    The United States is heading for bankruptcy, according to an extraordinary paper published by one of the key members of the country's central bank.

                    A ballooning budget deficit and a pensions and welfare timebomb could send the economic superpower into insolvency, according to research by Professor Laurence Kotlikoff for the Federal Reserve Bank of St Louis, a leading constituent of the US Federal Reserve.

                    Prof Kotlikoff said that, by some measures, the US is already bankrupt. "To paraphrase the Oxford English Dictionary, is the United States at the end of its resources, exhausted, stripped bare, destitute, bereft, wanting in property, or wrecked in consequence of failure to pay its creditors?" he asked.

                    According to his central analysis, "the US government is, indeed, bankrupt, insofar as it will be unable to pay its creditors, who, in this context, are current and future generations to whom it has explicitly or implicitly promised future net payments of various kinds''.

                    The budget deficit in the US is not massive. The Bush administration this week cut its forecasts for the fiscal shortfall this year by almost a third, saying it will come in at 2.3pc of gross domestic product. This is smaller than most European countries - including the UK - which have deficits north of 3pc of GDP.

                    Prof Kotlikoff, who teaches at Boston University, says: "The proper way to consider a country's solvency is to examine the lifetime fiscal burdens facing current and future generations. If these burdens exceed the resources of those generations, get close to doing so, or simply get so high as to preclude their full collection, the country's policy will be unsustainable and can constitute or lead to national bankruptcy.

                    "Does the United States fit this bill? No one knows for sure, but there are strong reasons to believe the United States may be going broke."

                    Experts have calculated that the country's long-term "fiscal gap" between all future government spending and all future receipts will widen immensely as the Baby Boomer generation retires, and as the amount the state will have to spend on healthcare and pensions soars. The total fiscal gap could be an almost incomprehensible $65.9 trillion, according to a study by Professors Gokhale and Smetters.

                    The figure is massive because President George W Bush has made major tax cuts in recent years, and because the bill for Medicare, which provides health insurance for the elderly, and Medicaid, which does likewise for the poor, will increase greatly due to demographics.

                    Prof Kotlikoff said: "This figure is more than five times US GDP and almost twice the size of national wealth. One way to wrap one's head around $65.9trillion is to ask what fiscal adjustments are needed to eliminate this red hole. The answers are terrifying. One solution is an immediate and permanent doubling of personal and corporate income taxes. Another is an immediate and permanent two-thirds cut in Social Security and Medicare benefits. A third alternative, were it feasible, would be to immediately and permanently cut all federal discretionary spending by 143pc."

                    The scenario has serious implications for the dollar. If investors lose confidence in the US's future, and suspect the country may at some point allow inflation to erode away its debts, they may reduce their holdings of US Treasury bonds.

                    Prof Kotlikoff said: "The United States has experienced high rates of inflation in the past and appears to be running the same type of fiscal policies that engendered hyperinflations in 20 countries over the past century."

                    Paul Ashworth, of Capital Economics, was more sanguine about the coming retirement of the Baby Boomer generation. "For a start, the expected deterioration in the Federal budget owes more to rising per capita spending on health care than to changing demographics," he said.

                    "This can be contained if the political will is there. Similarly, the expected increase in social security spending can be controlled by reducing the growth rate of benefits. Expecting a fix now is probably asking too much of short-sighted politicians who have no incentives to do so. But a fix, or at least a succession of patches, will come when the problem becomes more pressing."

                    U.S. 'could be going bankrupt'

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                    • #40
                      The United States faces almost a 40 per cent chance of slipping into recession in the next 12 months, according to the Federal Reserve's own market model.

                      As Fed chairman Ben Bernanke prepares to decide whether to raise American interest rates for the 18th time on Tuesday, bond prices and the high level of borrowing costs are now showing a 38 per cent chance of recession, according to a model published by Fed economist Jonathan Wright earlier this year.

                      After official payroll figures released on Friday showed that the economy created fewer jobs than expected last month, Wall Street began predicting Bernanke would halt the Fed's rate-hiking campaign this week. But some economists believe the central bank has already gone too far.

                      'They've hiked far too much,' said Ian Shepherdson of High Frequency Economics. 'The Fed has a long and inglorious history of raising rates too far, and cutting them too far.' He expects growth in the world's largest economy to have ground to a halt by the end of the year, even if Bernanke chooses to leave rates unchanged this week.

                      Predictions of a US slowdown came as analysts warned that the Bank of England's surprise rate increase on Thursday will cramp retail spending and wobble the vulnerable housing market - especially if consumers believe there are more rises to come. 'I wouldn't dismiss the impact of this; people have been lulled into thinking that rates don't move, and there will now be a period of reassessment,' said Jonathan Loynes, chief European economist at Capital Economics.

                      'A quarter percentage point is not a lot, but it's a signal,' agreed Miles Shipside, commercial director of property website Rightmove. 'Certainly if you were struggling to sell before Thursday, it won't be any easier now.'

                      Kevin Hawkins, director-general of the British Retail Consortium - which is expected to reveal this week that July was a relatively strong month on the UK high street - said the rise would leave retailers struggling once the 'World Cup effect' and the summer sunshine disappear. 'Later in the year we won't have the football, and we won't have this sort of weather - and if this really hits consumer confidence, I think it's going to be even harder to get any real sales growth.'

                      Fed admits U.S. recession on cards

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                      • #41
                        WASHINGTON (MarketWatch) - The United States is headed for a recession that will be "much nastier, deeper and more protracted" than the 2001 recession, says Nouriel Roubini, president of Roubini Global Economics.

                        Writing on his blog on Wednesday, Roubini repeated his call that the U.S. would be in a recession in 2007, arguing that the collapse of housing will bring down the rest of the economy
                        .
                        Roubini wrote after the National Association of Realtors reported Wednesday that sales of existing homes fell 4.1% in July, while inventories soared to a 13-year high and prices flattened out year-over-year.

                        "This is the biggest housing slump in the last four or five decades: every housing indictor is in free fall, including now housing prices," Roubini said. The decline in investment in the housing sector will exceed the drop in investment when the Nasdaq collapsed in 2000 and 2001, he said.

                        And the impact of the bursting of the bubble will affect every household in America, not just the few people who owned significant shares in technology companies during the dot-com boom, he said. Prices are falling even in the Midwest, which never experienced a bubble, "a scary signal" of how much pain the drop in household wealth could cause.

                        Roubini is a professor of economics at New York University and was a senior economist in the White House and the Treasury Department in the late 1990s. His firm focuses largely on global macroeconomics.

                        While many economists share Roubini's concerns about the imbalances in the global economy and in the U.S. housing sector, he stands nearly alone in predicting a recession next year.

                        Fed watcher Tim Duy called Roubini the "the current archetypical Eeyore," responding to a comment Dallas Fed President Richard Fisher made last week in referring to economic pessimists as "Eeyores" (after Winnie the Pooh's grumpy friend).

                        "By itself this slump is enough to trigger a U.S. recession: its effects on real residential investment, wealth and consumption, and employment will be more severe than the tech bust that triggered the 2001 recession," Roubini said.

                        Housing has accounted, directly and indirectly, for about 30% of employment growth during this expansion, including employment in retail and in manufacturing producing consumer goods, he said.

                        In the past year, consumers spent about $200 billion of the money they pulled out of their home equity, he estimated. Already, sales of consumer durables such as cars and furniture have weakened.

                        "As the housing sector slumps, the job and income and wage losses in housing will percolate throughout the economy," Roubini said.

                        Consumers also face high energy prices, higher interest rates, stagnant wages, negative savings and high debt levels, he noted.

                        "This is the tipping point for the U.S. consumer and the effects will be ugly," he said. "Expect the great recession of 2007 to be much nastier, deeper and more protracted than the 2001 recession."

                        He also sees many of the same warning signs in other economies, including some in Europe.

                        Coming U.S. recession will be nasty and deep, economist says

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                        • #42
                          The downturn in the US housing market will force businesses to slash 73,000 jobs a month in the new year and could be more damaging to the world economy than the dotcom crash, economists have warned.

                          After official figures last week showed that the number of new homes sold in July was 22 per cent lower than a year earlier, while prices were almost flat, fears are mounting that the 'orderly' housing slowdown predicted by the Federal Reserve will become a full-blown crash.

                          'Things do seem to be getting worse very quickly. Freefall is a strong word, but I think it's the right one to use here,' said Paul Ashworth, chief US economist at Capital Economics.

                          House prices have been rising at unprecedented double-digit rates in recent years, giving homeowners massive windfalls and supporting a wave of investment in new construction. However, the number of unsold new homes is now at a 10-year high.

                          Ashworth reckons 30 per cent of all the jobs created since the end of the last recession in 2001 - 1.4 million - have been in sectors related to the housing market boom, from construction to DIY stores. As the boom runs out of steam, Capital calculates that 73,000 jobs a month will be lost.

                          The Federal Reserve left interest rates unchanged for the first time in 18 meetings earlier this month, as chairman Ben Bernanke weighed the risks of high inflation and the threat to growth from the long-expected housing market crunch.

                          Stephen Roach, chief economist at Morgan Stanley, predicts that the property slowdown will shave at least 2 percentage points off GDP growth next year, taking the US perilously close to recession, as construction spending plummets and homeowners lose the cushion of extra wealth that comes from rapid price rises.

                          'For a wealth-dependent US economy, the bursting of another major asset bubble is likely to be a very big deal,' he said, warning that, with US fiscal and trade imbalances now larger than five years ago, the fallout for the rest of the world could be more devastating than the aftermath of the dotcom boom. 'A bursting of the property bubble poses equally serious risks for America's key trading partners and for the rest of an increasingly integrated global economy,' he added.

                          Anxieties about the fragile US housing sector come as analysts in the UK debate whether this month's rise in interest rates will dent prices here. Property website Hometrack will warn tomorrow that the so-called 'mini-boom' that has buoyed the market in London over the past few months will be snuffed out by higher mortgage costs.

                          Fionnuala Earley, group economist at Nationwide, said she believed the market could ride out the rate hike, but expects it to slow going into the new year. 'There are supportive factors: buy-to-let figures are strong, and immigration suggests there's going to be tenant demand, and there are property supply constraints,' she said. 'But if the MPC's raising rates, it's a warning shot, and people are going to think again about whether they should move and whether they should stretch themselves.'

                          U.S. housing slump fuels crash fears

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                          • #43
                            Investor optimism about the outlook for the U.S. financial markets fell in August to the lowest in nine months because of growing concerns about the housing market, according to a UBS AG poll.

                            The UBS/Gallup Index of Investor Optimism slipped to 53 in August, the lowest reading since last November, from 55 in July. The index has dropped 40 points since reaching a 19-month high in January.

                            Pessimism about the housing market increased this month, the survey found, with 70 percent of investors saying conditions in the residential real estate market are getting worse, up from 63 percent in June. The percentage of investors who rated conditions in the housing market as "only fair" or "poor" jumped to 56 percent from 46 percent in July.

                            "The drop in confidence in the real estate market reflects the economic data for that sector and suggests that investors are feeling the pinch in their local markets," wrote Anne Briglia, senior fixed-income strategist at UBS Wealth Management Research.

                            U.S. stocks declined last week after data showed that sales of previously owned homes fell in July to the lowest in more than two years, while new home sales slid to the second-slowest pace of 2006.

                            High energy prices and so-called geopolitical concerns were also cited as major concerns of investors.

                            The survey of 802 randomly selected investors with total savings and investments of at least $10,000 was conducted by UBS and the Gallup Organization from Aug. 1 to Aug. 17. The poll has a margin of error of plus or minus 4 percentage points.

                            Housing skid worries investors: Optimism falls to 9-month low

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                            • #44
                              The United Arab Emirates central bank will watch the impact of US monetary policy on the dollar and wait for a dip in the euro before diversifying its currency reserves, the bank's governor said yesterday.

                              The Gulf Arab oil exporter's central bank decided this year to convert 10 percent of its largely dollar-denominated foreign exchange reserves into euros and gold, but governor Sultan Nasser Al-Suweidi said the switch had not yet been carried out.

                              With the US Federal Reserve halting a two-year campaign of monetary tightening in August, Suweidi told Reuters he wanted to assess the impact of monetary policy on the dollar. "We are waiting to see the outcome of that decision.

                              There's a shift in the strategy of the Fed. That will entail a new strategy on our side," he said.

                              "We expect the Federal Reserve will stop hiking interest rates, and (cut) interest rates as a matter of fact, in...6-9 months from now," he later told reporters after meeting central bankers from the across the world's top oil exporting region.

                              With analysts predicting an end to Fed policy tightening, the euro is gaining luster in the eyes of many investors, especially with the European Central Bank expected to keep raising rates into next year.

                              The dollar has fallen more than 7 percent against the euro this year. It has also declined more than 20 percent against a basket of major currencies since 2001, partly due to concerns about the widening US trade deficit.

                              Suweidi said the central bank would wait for a dip in the euro before making purchases to diversify its currency reserves, which stood at $23 billion in December.

                              "Normally you wait for a downtrend to buy and catch it as it goes up," he said, adding that the UAE central bank favored investing in US corporate bonds rather than government Treasuries because of their relatively attractive yield. He said no decision had been made yet on gold purchases.

                              Suweidi said the central bank was still committed to diversifying it reserves and that the bank's board would meet later this month to consider the timing of the switch.

                              Markets have become particularly sensitive to any suggestion that central banks, especially those in countries with large current account surpluses, are moving some of their holdings away from dollars into euros.

                              Central banks worldwide hold more than $4 trillion in total reserves.

                              Gulf Arab central banks account for only about 10 percent of the region's foreign-exchange reserves, but they offer a rare window on official thinking in the Gulf, where vast surpluses of oil cash are controlled by secretive government-linked investment arms.

                              The state-owned Abu Dhabi Investment Authority, for example, manages between $450 billion and $500 billion, according to an estimate by Standard Chartered.

                              Other Gulf Arab central banks are studying the euro's growing allure as a reserve currency.

                              A Qatar central bank official said in April the bank was buying euros, which could eventually account for up to 40 percent of reserves.

                              But the Saudi Arabian Monetary Agency (SAMA) reiterated that there would be no change in its reserve policy. SAMA Governor Hamad Al-Sayari also ruled out any revaluation of the riyal, which like other Gulf Arab currencies has been pegged to the US dollar in the run-up to monetary union in 2010.

                              Investors betting on a revaluation zeroed in on the currency of the world's largest oil exporter earlier this year, after Kuwait revalued its dinar, triggering speculation that other Gulf states would follow suit.

                              Suweidi said the common Gulf currency would probably be pegged initially to one foreign currency, most likely the dollar, rather than a basket of currencies, and then allowed to float a few years after monetary union.

                              UAE central bank watches impact of US monetary policy on dollar

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                              • #45
                                Financial markets have failed to price in the risk that any one of a host of threats to economic stability could materialise and deliver a massive shock to the world economy, the International Monetary Fund warned yesterday.

                                The world's chief financial watchdog said the financial system had so far proved resilient in the face of recent price falls but warned the risk of a crash had increased. And when it comes to worrying about a crash in the financial markets that could deliver a body blow to the world economy, it seems that all roads lead to the US.

                                The IMF highlighted five major risks, all but one of which can be attributed to a greater or lesser extent to the economy and foreign policies of the US administration. Not that the politically savvy IMF phrases it exactly like that.

                                Its message coincided with a stark warning from HSBC, one of the world's largest investment banks, that it had put the US on alert for "recession risk".

                                The fund, which is holding its annual meetings this week, issued its warning in its closely watched, twice-yearly Global Financial Stability Report. It highlighted a sharp slowdown in the US economy, triggered by a slump in house prices, as the major risk. Other dangers included:

                                * A surge in inflation that would force central banks, particularly the US Fed, to impose sharp rate rises that would ripple through emerging markets

                                * A rebound in oil prices on the back of mounting speculation of geopolitical tensions - a reference to a showdown between Iran and the US over nuclear technology

                                * A sudden unravelling of the record imbalances between surpluses in Asia and deficits in the US

                                * A mutation in the avian flu virus that would lead to a "sharp decline in economic activity".

                                Jaime Caruana, director of the IMF's monetary and capital markets department, said: "Markets appear to price in little provision for these risks. So if one or some combination of these risks materialises, financial markets could experience greater turbulence that places stress on international markets, possibly with a wider impact on the global economy."

                                He said markets were now much more focused on a US-led global slowdown rather than the threat from global imbalances that has worried the IMF for the past six years.

                                However Hung Tran, Mr Caruana's deputy, said: "Comparable countries such as the UK and Australia experienced a strong upturn in prices and then a deceleration and the process has been seen as a soft landing so there is hope - which is our central case - that the US will experience something similar.

                                "However, it is clear that the risks are on the downside of a sharper than expected slowdown [in house prices] that would produce weaker-than-expected growth that would have implications for global growth and financial markets." This risk segues directly into fears of a slump in the dollar. HSBC issued a "recession-risk" alert for the US economy that would trigger a sharp fall in the dollar and pound.

                                David Bloom, a global economist, said the US would slow sharply next year, prompting investors to pull out of their massive gambles on US assets that so far had succeeded in offsetting record trade deficits. "Once these assets stop performing well and the dollar drifts lower, the dollar and asset cycle can turn more vicious. Once one does not want to buy an asset because of the fall in the dollar then the dollar starts to impact back on assets."

                                The IMF said its assumption was that any decline in the dollar would be "orderly", but there could be a more pronounced drop. It warned one reason the dollar could fall would be if investors believed it was clear the world's leading economies would fail to take action to resolve the imbalances between saving and demand across the world.

                                "A gradual and orderly adjustment would very likely depend on a credible policy framework for resolution of global imbalances over the medium term," the report said. "Accordingly, the risk of a disorderly dollar adjustment could arise without policies being put in place to foster the needed adjustments in savings and investment imbalances."

                                The IMF has done its bit, setting up a multilateral consultation between China and the US, as well as Saudi Arabia, to find a way to resolve the imbalances.

                                Its keynote world economic outlook published tomorrow will undoubtedly reiterate that the US must cut its deficits, China must liberalise its financial system and allow its currency to appreciate, the oil-rich countries should invest their windfall for growth while Europe should do more to boost its sluggish growth rates.

                                A fall in the dollar would also add to the inflation in the US as import costs rose. Inflationary pressures have been rising thanks to soaring energy costs.

                                The GFSR report showed that while long-run inflation expectations in the US have picked up, the inflation-related risk premium that investors are forced to pay has declined. "Should these gains erode and risk premiums for unexpected inflation increase, asset markets could come under pressure with potentially negative consequences for the real economy," it said.

                                Meanwhile, oil prices jumped more than a dollar a barrel yesterday, ending a run of recent declines. US oil prices broke back through $66 a barrel after a foiled attack on the US embassy in Damascus.

                                Unsurprisingly, the IMF did not give estimates for the financial implications of a dollar crash. But last month it published research by a leading economist that found, with a 10 per cent fall in the dollar, US stocks and bonds would wipe out $1.2 trillion of wealth held for foreigners.

                                The research found that UK investors held $471bn of US assets, the second largest in the world behind Japan. However, a national 10 per cent slump in asset prices would wipe out the equivalent of 5 per cent of GDP compared with almost 15 per cent in Italy.

                                The IMF did highlight consensus forecasts yesterday showing even an orderly decline in the dollar would not be shared equally across the world. The forecasts showed the fall would be absorbed entirely by a rise in the currencies of Japan, China, Korea, Taiwan, Singapore and Malaysia. On a general note, the IMF said the financial system had withstood a fall in prices and a rise in volatility in May after an unexpectedly large rise in inflation.

                                The IMF said corporate fundamentals were still solid, equity valuations were not stretched in most markets and major financial institutions were profitable and well capitalised.

                                However, it remarked: "In these circumstances it is reasonable to wonder whether financial markets might react to less favourable developments in a way that would amplify - rather than dampen - the emerging risks." The trigger for a shock to asset prices can come out of the blue, perhaps a natural disaster or a health epidemic such as bird flu.

                                The IMF reiterated its fears that an outbreak would reduce investors' appetite for risky investments, cut capital flows between companies and weaken financial systems as absenteeism rose.

                                David Nabarro, the senior UN System Co-ordinator for avian and human influenza, is in Singapore at the weekend to meet Jim Adams, head of the World Bank's avian flu taskforce.

                                But could political instability - such as that at the highest levels of the Labour Government this week that knocked the pound - trigger a crash? Mr Hung dodged the specific question, but said: "In the short term, this is very noisy and can distort uncertainty in exchange rates so we try to look over the medium term." Mr Caruana added: "There will always be surprises - but surprises are surprises."

                                IMF: risk of global crash is increasing

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