IMF chief changes position, says dollar has room to fall


By Bob Davis
The Wall Street Journal
Monday, October 15, 2007

WASHINGTON -- After a week of saying that the dollar had fallen too far recently, International Monetary Fund chief Rodrigo de Rato now says the dollar has more room to fall over the next several years.

Over the "medium term" -- three to five years in IMF lingo -- "we still see room for further depreciation," Mr. de Rato said. "If you look at future markets, you will see that markets are more or less seeing the same." As for the euro, Mr. de Rato said, it is "very near" its equilibrium value.

For the past week Mr. de Rato had been pressing a different message -- that the dollar had fallen too far. He first made the remark in an interview with Financial Times, and then repeated it in Madrid, and in a session with The Wall Street Journal. He said that he was referring to the decline of the dollar compared to "weighted" average of currencies over the past several years. The dollar gained slightly against the euro after his initial remarks.

Mr. De Rato's comments set off a series of meetings within the IMF as it struggled to get its message straight before the meeting this Friday of finance ministers from the Group of seven industrialized nations -- U.S., Canada, Italy, Britain, Germany, France and Japan. The alignment of global currencies is likely to be discussed by the ministers in the wake of the global credit crunch and U.S. interest rates cuts.

Mr. de Rato is especially under the spotlight. His earlier remarks about the dollar being "undervalued" could look as if he were siding with European officials who worry that the strength of the euro, compared to the dollar, is undermining European exporters. Many in the Spanish press speculate that Mr. de Rato, a former Spanish economy minister, who is resigning at the end of this month is gearing up to run for prime minister in Spain. Mr. deRato denies that he will seek office in Spain.

At a breakfast for the press Monday, Mr. de Rato repeated his remarks that the depreciation of the dollar had been "quite substantial." But then he added his projection that the dollar still had room to fall in the coming years. IMF officials say that his remarks were meant to convey, more accurately, the Fund's view of the dollar, and didn't reflect any pressure from the U.S. Treasury or European finance ministries.

"There's still some depreciation to come in the medium term," said the Fund's chief economist, Simon Johnson.

Mr. de Rato's clarification underscores the difficult that even experienced financial officials have in dealing with questions of the currency. U.S. officials are quick to repeat their mantra that they favor a "strong" dollar -- even as they do nothing to defend the currency as it falls in value. In effect, the U.S. government depends on a steady decline of the dollar to reduce the U.S.'s current account deficit. If that deficit remains too high, many economists worry, it could ultimately lead to a crash in the dollar.

The U.S. and Europe also have been pushing China to let its currency rise in value against both the dollar and euro, as a way to boost minimize "global imbalances" -- and give a boost to U.S. and European exporters. Mr. de Rato repeated the IMF's view that the yuan "should have more flexible movement." He said that was in China's interest because it would "allow for strong growth and strong domestic consumption."

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