Excessive fiscal deficits in the US could hurt the long-term sustainability of the American and global economies, the International Monetary Fund warned.
The US economy has been improving
Recession, tax cuts and high spending for the war on terrorism have resulted in large deficits, the IMF said.
That could place upward pressure on interest rates, and pose risks for the US economy and rest of the world.
IMF Deputy director Charles Collyns, said international investors could also lose confidence in the dollar.
That, he said, could force them to consider investing elsewhere.
Noting the dollar's recent slide against the euro, UK pound, and yen, the IMF said an unrestrained drop could have serious consequences at home and abroad.
The IMF report said the dollar has been affected by the
mushrooming US current account and budget deficits.
"This trend (of deficits) is likely to continue to put pressure
on the US dollar, particularly because the current account deficit increasingly reflects low saving rather than high investment.
"Although the dollar's adjustment could occur gradually over an extended period, the possible global risks of a disorderly exchange rate adjustment, especially to financial markets, cannot be ignored," the IMF said.
"Episodes of rapid dollar adjustments failed to inflict significant damage in the past, but with US net external debt at record levels, an abrupt weakening of investor sentiments vis-a-vis the dollar could possibly lead to adverse consequences both domestically and abroad."
It also said the deficits could deter private investment within the US, impede long-term productivity growth, and endanger the vitality of social security and Medicare programs.