IMF warns over dollar collapse

IMF's Koehler: Guardian of global financial markets

The head of the International Monetary Fund, Horst Koehler, has warned that central banks worldwide might need to work together to prop up the US dollar.

We can't have a world where excessive profits are reaped, and then, all of a sudden, the IMF and governments have to repair the damage

Horst Koehler, Managing Director, IMF

In an interview in the Financial Times newspaper, Mr Koehler said that "no intervention at all is not the right answer" should the dollar continue to decline in a "disorderly fashion".

The dollar has fallen by around 10% in the last few months, nearly reaching parity with the euro.

But the US administration is opposed to intervention in currency markets.

In September 2000, during the presidential term of Bill Clinton, the US Treasury did agree to joint action to boost the value of the euro, which had reached a record low of around $0.84.

Alan Greenspan, the influential head of the Federal Reserve, the US central bank, is expected to give his view on the dollar's weakness when he testifies to Congress on 16 July.

Danger of meltdown

The global fall in stock markets amid uncertainty over the strength of the US economic recovery has led to further doubts about the strength of the dollar.

The US is also facing the largest trade deficit in its history.

A weak dollar would hurt exporters in Europe and the Far East by making their goods more expensive in the US, while in turn increasing inflationary pressures there.

Mr Koehler said that there was a danger that financial markets could "exaggerate problems so that they become a self-fulfilling prophecy".

But he admitted that there was a one-in-five chance of a global financial meltdown.

That could happen if a further stock market collapse in developed nations happened at the same time as debt defaults by developing countries such as Brazil and Turkey - both receiving IMF help at the moment.

And he warned that the financial excesses of the past had created problems for governments and international institutions.

"We can't have a world where excessive profits are reaped, and then, all of a sudden, the IMF and governments have to repair the damage," Mr Koehler said.

Admitting mistakes

Mr Koehler has admitted that in the past the IMF - which provides short-term financial help to countries in trouble - had not paid enough attention to building a social security safety net for the poor.

The IMF has come under withering criticism - especially from the former chief economist of the World Bank, Joseph Stiglitz - for enforcing financial orthodoxy and deflationary policies on countries affected by the Asian crisis.

Mr Stiglitz has also criticised former IMF officials, such as former deputy director Stanley Fischer, for accepting jobs with large commercial banks after they retired from the fund.

In return, IMF chief economist Kenneth Rogoff said that Mr Stiglitz, who won this year's Nobel Prize in Economics, was "a towering genius as an academic... as a policymaker, however, you were just a little bit less impressive".