US dollar may devalue further

The dollar is likely to be devalued to deal with the booming trade deficit in the United States, raising the prospect of global financial instability.

    The greenback has already fallen 20% against major currencies

    The UN Conference on Trade and Development (UNCTAD) published a report on Thursday indicating the dollar's 20% devaluation against major currencies had so far failed to provide "much of a stimulus" to the US economy.
      
    The deficit was forecast to grow further in 2004, while the impact of expansionary monetary policy in the US will be limited by the inflationary impact of rising oil prices, according to UNCTAD.
      
    "The large trade deficit of the United States is likely at some point to be tackled through exchange rate movements, through a devaluation of the dollar," said Carlos Fortin, deputy secretary general of UNCTAD.
      
    That would "produce immediately exchange rate instability and generally financial instability," he told journalists, warning of a further knock-on impact on global trade with a potential rise in protectionism. 
      
    Predictions

    Fortin predicted that a devaluation would prompt Asian countries to withdraw their capital from US money markets and to buy assets in other denominations, notably the euro.
      
    "There is very serious cause for concern about the sustainability of the situation," he added. 
      

    "The large trade deficit of the United States is likely at some point to be tackled through exchange rate movements, through a devaluation of the dollar"

    Carlos Fortin,
    UNCTAD deputy chief

    UNCTAD globalisation expert Heiner Flassbeck said there was a danger that European countries would then be tempted to drive down the value of the euro in order to compete with the dollar.
      
    "Then the only way out would be falling back to protectionist measures. The discussion will definitely come up in the United States," he said. 
      
    Factors

    Apart from the world's traditional reliance on the US as a motor of growth despite the rising US deficit, UNCTAD's report also blamed high oil prices and large disparities in demand for dampening optimism.
      
    Until recently, European countries would have seen a brisker growth in demand that would have reduced the gap with the US economy and improved the chances of reducing the US deficit "without a major depreciation", Flassbeck added.
      
    "I think the time now is over. Sooner or later it is going to happen." UNCTAD estimated that the US current account deficit would reach about six to seven per cent of gross domestic product this year.
      
    The US has been pressing China to float its currency and allow a rise in the yuan and relieve some of the US trade deficit.
      
    But Flassbeck urged China not to float the yuan and "not to give in to international pressure because the result would be totally uncontrollable".

    SOURCE: AFP


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