The apparent inevitability of the dollar’s decline was brought into sharp relief this week following a steep drop in the markets Thursday, the same day a top Chinese official alluded to rumours of a possible 25% slide in the greenback. But leading economists and businessmen yesterday remained unperturbed.
“I personally do not think there will be a disorderly adjustment because it is not in anyone’s interest to see that happen. There is growing international consensus that adjustments have to be made to correct global financial imbalances,” said Shigemitsu Sugisaki, former deputy director of the IMF who has also served as a senior official in the Japanese finance ministry.
Sugisaki’s assertion that the shift can be “managed” reflects growing confidence in measures to address the mismatches in financial flows that mean that the world’s richest economy is borrowing billions from its poorer trading partners. The coopting of the Fund to coordinate steps is seen as an important indicator of progress.
“Part of the scenario of adjustment in current account positions is that there is an adjustment in exchange rates,” commented former head of the Bank for International Settlements Andrew Crockett to Emerging Markets. “I’m not saying it will happen suddenly or in a disorderly fashion, it could happen at a gradual and non-disruptive pace,” added Crockett, who is now president of J.P. Morgan International.
The dollar has already slid about 25% on a trade-weighted basis over the past four years in a pattern of slips interspersed with periods of stability. Now the excess liquidity that has helped finance the US deficit is drying up, with monetary policy tightening across the world’s biggest economies.
It seems likely that declines will continue. A weaker dollar, it’s almost unanimously agreed, is part of the solution, though economists note that for currency moves to eliminate the US deficit completely the changes required would so vast as to be unacceptable to governments and central banks. Structural changes, such as higher savings in the US and spending elsewhere are also central to the puzzle.
Managing director of the Washington-based Institute of International Finance Charles Dallara warned that there’s no room for complacency: “I don’t see any sense of urgency or any game plan” to deal with the situation, he told Emerging Markets. The G7 and the IMF must work out a coordinated approach to deal with the imbalances while there is still time, he said.
Dallara later told an IIF seminar on private capital flows and financial market development that: “if global imbalances are not dealt with the global environment could become not only difficult but downright nasty.” He added that he doubted whether financial markets had fully “priced in” such risks.
Shigemitsu Miki, chairman of Japan’s Bank of Tokyo-Mitsubishi UFJ echoed the call for more dialogue, recommending a greater role for the private sector. “Adjustment must come,” Miki noted but he sees no reason for the dollar to “plummet.” The US “has major deficits its economy also has great strengths,” said Miki who acts as an advisor to various Asian monetary authorities.
The feeling is that if Ben Bernanke, Jean Claude-Trichet, Fukui and Zhou have determined to fix the situation, there’s no reason why it can’t be done, especially as politicians are starting to come on board. With the global economy proceeding a-pace and inflation seemingly under wraps, the conditions seem as auspicious as they ever will be.