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US Rejects IMF Warning that Debts Could Affect Global Economy - 2004-01-08

The U.S. Treasury Department Thursday rejected a warning from the International Monetary Fund that the huge American trade and budget deficits could pose a risk to the global economy.

A Treasury spokesman dismisses the IMF report as breathless hyperbole. The IMF says the $500 billion U.S. fiscal deficit combined with a $135 billion trade deficit could undermine the world recovery by pushing the dollar lower and interest rates higher.

Treasury Secretary John Snow acknowledged Wednesday that the growing fiscal deficit is a problem. But he promised to cut the deficit by half within five years. Mr. Snow outlined several reasons why the deficit is higher than anticipated.

"The war in Iraq: It is a one-time thing. But it had to be dealt with. Afghanistan had to be dealt with," he said. "But they created a bulge in [government] spending. And then we had the tax reductions."

The IMF has for a long time been worried about the burgeoning U.S. trade deficit. Its concern about the U.S. fiscal deficit is more recent, as the United States went from having a budget surplus in 2000 to having a very large deficit just three years later.

Alex Beuzelin, a currency specialist in Washington for Ruesch International says the downward adjustment in the exchange rate of the dollar is a useful way to bring down the U.S. trade deficit. A cheaper dollar makes U.S. exports cheaper and imports more expensive. But Mr. Beuzelin says a more expensive yen and euro will cause problems for Japan and Europe.

"As the dollar weakens and their currencies strengthen, this could undermine their recovery prospects and, of course, that would diminish the outlook for overall global economic growth," he said. "In addition, when you've got a record high current account deficit and a record budget deficit, down the road this could put upwards pressure on U.S. interest rates."

On balance Mr. Beuzelin agrees with many international economists in believing that the year-long decline in the dollar is a good thing for the world economy. However, he faults Treasury Secretary Snow for continuing to state publicly that the United States favors a strong dollar.

"Nobody in the foreign exchange markets, or investors in general, believes that the administration really has a problem with the dollar's decline," he said. "They just want to keep it orderly so as to not have any adverse consequences on the U.S. economy or U.S. financial markets."

The dollar registered significant gains against other major currencies from 1995 to 2001. It has now given up most of those gains and is at an 11-year low against the British pound, a record low against the euro, and a seven-year low against the Swiss Franc.