IMF chief warns of threat to dollar but doesn't acknowledge its source

6p CT Monday, October 22, 2007

Dear Friend of GATA and Gold:

Stories like the Agence France-Presse report appended here are doubly frustrating -- first for the obvious attempt at deception in the comments being reported, and then for the failure of the news organization covering the story to point it out.

It's a story about the departing head of the International Monetary Fund, Rodrigo Rato, a spokesman for international central banking, warning that the U.S. dollar could crash. But as Rato knows full well, the dollar is being supported by central banks and cannot crash unless they withdraw their support. Rato frames the danger to the dollar as if the source of the danger has nothing to do with his own sponsors.

And the AFP report fails to put the key question to Rato: In what circumstances will his central bank sponsors withdraw support for the dollar?

Why the United States should worry about any such withdrawal of support for the dollar by other central banks is hard to understand when those other central banks have been so subservient for so long. As Nixon administration Treasury secretary John Connally spat at them 36 years ago, "It's our currency but your problem." They have let it remain their problem ever since.

Of course if financial journalists ever were to put such direct and pointed questions to central bankers, the central bankers would allow financial journalists even fewer encounters for comment. But anything that showed up the secrecy, unresponsiveness, and unaccountability of international central banking would be a great start for journalism.

CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.

* * *

IMF Chief Warns Dollar May Suffer 'Abrupt Fall'

By Veronica Smith
Agence France-Presse
Monday, October 22, 2007

http://news.yahoo.com/s/afp/20071022/ts_afp/imfeconomyforexdollar_071022...

WASHINGTON -- The head of the International Monetary Fund, Rodrigo Rato, warned Monday of a potential "abrupt fall" in the US dollar that could roil the global economy.

"There are risks that an abrupt fall in the dollar could either be triggered by, or itself trigger, a loss of confidence in dollar assets," Rato said at the close of annual meetings here of the IMF and the World Bank.

The outgoing IMF managing director spoke here as the European single currency hit a new high of 1.4347 dollars and global equity markets plunged amid renewed fears a US credit crunch could pitch the world's biggest economy into recession.

"The uncertainty ... comes from downside risks that are much higher than they were six months ago. The turbulence in the credit markets is a warning that we cannot take the benign (global) economic environment of recent years for granted," Rato said on the final day of the annual meetings of the IMF and the World Bank.

"We still do not know the full effects of the decline in the housing market and the subprime problems of the US economy. Further disruption in financial markets and further falls in housing prices could lead to a global economic downturn," he said.

A crisis in the risky US subprime mortgage sector, where loans are given to homebuyers with poor credit histories, erupted this year as borrowers defaulted on mortgages amid rising interest rates and a sharp slump in US housing prices.

The credit woes spilled into global financial markets and roiled stock markets worldwide in August. Although markets have recovered somewhat, the uncertainties of the extent of the problems are plaguing investors.

US Treasury Secretary Henry Paulson, addressing the plenary session of the 185-nation twin financial institutions, also sounded a note of caution.

"We need to continue to be vigilant, because all of our capital markets are not yet functioning normally," Paulson said.

Rato warned that a global slowdown would exacerbate other existing risks, noting emerging economies' reliance on private capital inflows which are expected to reach a record 620 billion dollars this year, after a 2006 total of 573 billion, according to the Institute of International Finance.

"Some emerging economies that have relied on external financing to fund large current account deficits could be tipped into crisis by a combination of reduced demand for their exports and tighter financial market conditions," the IMF chief said.

He urged the governors of the IMF, which has a core mission of fostering global financial stability, to take action to avert a calamitous downturn.

"All of these risks make action on already agreed policies more urgent," said the former Spanish finance minister, who is stepping down nearly two years before the end of his five-year mandate.

His successor, Dominique Strauss-Kahn, a former Socialist finance minister of France, takes office on November 1.

Rato also appeared to suggest that Europe may take steps to temper the strong appreciation of the euro, which is weighing on exports from the 13-nation bloc.

"There is a risk that exchange rate appreciation in countries with flexible exchange rates -- including the euro area -- could hurt their growth prospects, and that in these circumstances protectionist pressures could worsen," he said.

Nevertheless, in an apparent reference to recent pressures from France and other eurozone members on the European Central Bank to curb the euro, Rato said: "Policymakers need to respect the independence of central banks and support their vigilance on inflation."

* * *

GATA is grateful for financial contributions, which are federally tax-deductible in the United States.