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Peter Brimelow: Gold grinds in

Section: Daily Dispatches

By Heather Stewart
The Observer, London
Sunday, May 14, 2006

http://observer.guardian.co.uk/business/story/0,,1774162,00.html

The International Monetary Fund is in behind-the-scenes talks with
the US, 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.Amid
tumultuous trading, which sent the dollar to its lowest level in a
year against the euro in late trading on Friday and gave the FTSE
its worst day for three years, the IMF was working privately to
exercise its new powers to bring decision-makers together.

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. With the
long-predicted dollar bear market sending ripples throughout the
world, the IMF is keen to use its powers as soon as possible.

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 US economy.

David Bloom, currency strategist at HSBC, described the switch of
focus as a "regime change." "I'm saying don't use the philosophical
methodology you used last year: chuck it away. The market has
wholesale changed the way it looks at the world," he said,
predicting that the euro could rise to $1.40 over the next 12
months, from its current level close to $1.29.

Few analysts expect IMF discussions to result in a concerted deal on
stemming the dollar selloff; 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."

Bloom warned that "Phase 2" of a selloff would cause turmoil in the
equity markets, as on Friday, when both the Dow Jones and FTSE saw
sharp losses. "I'm expecting an increase in volatility and
uncertainty across the board," he said.

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 US current account deficit with the rest of
the world worth 7 percent 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.

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