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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: GST who wrote (51072)	1/23/2006 8:19:37 PM
From: russwinter	Read Replies (1) \| Respond to of 110194

By Andrew Peaple and Emily Barrett Dow Jones Newswires Monday, January 23, 2006 LONDON -- A run on the U.S. dollar that would see investors rushing to dump the currency is a possibility, although it's difficult to judge how likely an outcome that is, the International Monetary Fund's chief economist said Monday. Speaking at a conference on global imbalances, Raghuram Rajan also said a rapid and large appreciation of the Chinese yuan against the dollar and other currencies would be more likely to damage the world economy than be of benefit to it. With the U.S. current account deficit running at close to 7% of gross domestic product, economists have long expected the dollar to depreciate against other major currencies, and feared the dollar could go into free fall if that prompted international central banks and investors to flee the greenback. "We are in a risky situation," said Rajan. "You cannot discount a run on the dollar. But you cannot fully quantify that risk at the moment." Rajan added that he's more concerned about the possibility that a run on the currency will be triggered by foreign private investors abandoning the dollar than the risk that international central banks will diversify away from U.S. assets. "The first action will come from foreign private investors, who have no motives other than returns," he said. The U.S. government has long argued that China's yuan is undervalued against the dollar, leading to a large bilateral trade deficit between the U.S. and China. The Chinese authorities are very slowly moving towards a more flexible currency regime, having abandoned a pure dollar peg in July in favor of fixing the yuan against a basket of currencies. Since that move, however, the yuan hasn't moved much against the dollar, and U.S. politicians and industrial lobby groups continue to call for a stronger yuan. But Rajan said a sharp appreciation in the Chinese currency could be more of a curse than a blessing for efforts to rebalance the global economy. Although a sharply stronger yuan would boost Chinese consumer demand by making imported goods cheaper, it could also slow the country's economy by hitting its exports. "A huge step appreciation (in the exchange rate) would do more harm than good, " Rajan said. He added that the IMF advocates a more gradual approach to allow the yuan to respond to market forces more flexibly. The IMF is also urging the U.S. to cut its budget deficit, and pressing the European Union and Japan to implement structural reforms that will boost their long-term growth potential. But Rajan said there is a risk that before these actions are taken to rebalance the global economy, rising protectionism will lead to weaker growth. "The...worry is that before (these adjustments) happen, we'll have much greater protectionist forces raising their head, Rajan said.