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IMF acts to avoid markets meltdown

Heather Stewart

The weakening of the dollar seems to be the start of a long-awaited global readjustment.

THE INTERNATIONAL Monetary Fund is in behind-the-scenes talks with the U.S., China, and other major powers to arrange a series of top-level meetings about tackling imbalances in the global economy, as the dollar sell-off reverberates through financial markets.

At the IMF's Spring Meetings last month, its managing director, Rodrigo de Rato, was handed new responsibilities to carry out "multilateral surveillance," assembling groups of relevant countries to discuss critical issues in the global economy.

Analysts believe the weakening of the dollar is the beginning of a long-awaited readjustment in the global economy. After the Federal Reserve appeared to hint last week that it could pause in its series of interest rate rises, attention in the markets switched to the weaknesses of the U.S. economy.

Few analysts expect IMF discussions to result in a concerted deal on stemming the dollar sell-off; but governments and central banks will want to avoid a crisis.

"We are in meltdown mode," said David Brown, chief European economist at Bear Stearns. "It's all being whipped up into a bit of a selling frenzy. The dollar has a massive portfolio of negatives against it: it's the long-term problems of the trade deficit, and the government's budget deficit."

Mr. Brown added that the dollar's woes were likely to be exacerbated by central banks shifting their reserves towards other currencies, including the euro. "Asian central banks have been buying fistfuls of dollars as the flipside of their massive current account surpluses. They're long dollars."

He added that with the U.S. current account deficit with the rest of the world worth 7 per cent of its GDP in 2005, the White House and the Federal Reserve would probably be happy to watch the dollar decline. "I don't think Washington's going to be concerned," he said.

- Guardian Newspapers Limited 2006

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