Rato Warns of Cheap Dollar and Growing Credit Crunch

Reuters

MADRID -- IMF chief Rodrigo Rato said Monday that the U.S. dollar was undervalued and risks to the global economy from market turbulence were greater than six months ago.

"From the point of view of comparison on a weighted trade basis, the dollar would be below parity, but that doesn't mean that is the case against all currencies," the International Monetary Fund's managing director said at an economic seminar in Madrid.

The dollar has declined sharply against the euro since defaults on U.S. mortgages in August triggered a global credit squeeze and an aggressive U.S. Federal Reserve interest rate cut last month.

The dollar fell to a record low against the euro last week and an index that gauges its value against a basket of six other major currencies also fell to a record low.

Rato, who hands over the leadership of the IMF to Dominique Strauss-Kahn at the end of this month, said financial markets faced a serious situation that was far from resolved.

The credit crunch has so far hit wealthy nations hardest. Rato saw risks of it spreading to developing countries if it jumped into an emerging market.

"This would produce a globalization of risk and an increase in financing cost for all emerging market countries," Rato said, adding that was not a situation the IMF saw happening at present.

He said the Fed's decision to cut interest rates, and moves by the European Central Bank and Bank of Japan to keep them steady, had helped alleviate the credit crunch caused by banks' reluctance to lend to one another.

"These are sensitive decisions that will help to limit the impact on the general economy," Rato said.