Dollar slips on IMF warning

The dollar could be in for a nasty shock

The strong US dollar is in danger of falling sharply against other major currencies, according to the International Monetary Fund's annual snapshot of the world's largest economy.

This is because the US has been importing far more than it has exported during the last couple of years, the IMF said.

The dollar fell in Tokyo on Wednesday following the warning, sliding against both the yen and the euro in Asian trade, despite reminders that the Fund's warning was not new.

"It's important to note that the IMF has said this many times before," said Foreign Exchange Analytics partner David Gilmore.

The dollar fell to 121.37 yen, just short of a two month low, and the euro rose to a three month high against the dollar at 90.38, in the US late on Tuesday after the report's release.

A sharp rise in US imports during 2000 offset a healthy rise in exports, pushing the external current account deficit out to 4.5% from 3.5% in 1999, the Fund reported.

The $28.3bn deficit is not sustainable in the long-run, its size raising "concerns that the dollar might be at risk for a sharp depreciation", the IMF said.

Expensive tax cuts

The Fund also warned that the total cost of the $1.35 trillion tax cuts pushed through by President George W. Bush was "likely to be higher than current estimates", arguing that the tax measures were unlikely to expire as scheduled.

The fund warned against overspending by the US authorities due to such uncertainty.

However, the IMF also described the tax cuts as "appropriate and timely" and said they "will help to insure against a sharper economic slowdown".

Gloomy outlook

The "uncertainty surrounding the economic outlook [is] higher than usual" at the moment in the US, the fund said.

Businesses must continue improving efficiency if the US economy was to snap back to a path of sustainable growth, it said.

This would boost US companies in competition with non-US firms, both in their domestic market and in their export markets.

The IMF also urged the US to "continue to push for further liberalisation of international trade on a multilateral basis".

Social Security and Medicare

Having acknowledged the short and medium-term benefits of President Bush's tax cuts, the IMF went on to call for "priority to be given to strengthening the financial outlook for the state Social Security pension and the official Medicare health insurance, particularly because at present there are sufficient resources available to address these problems".

US politicians who had been opposed to the recent tax cuts had said that they were damaging to the pension and health insurance programme.