Currency likely to be devalued because of deficit
GENEVA — The US dollar is likely to be devalued to deal with the booming trade deficit in the United States, raising the prospect of global financial instability, the UN Conference on Trade and Development said yesterday.
Unctad said in its 2004 Trade and Development Report that the weakening of the dollar by up to 20 per cent against major currencies had failed to provide “much of a stimulus” to the US economy. The deficit was forecast to grow further this year, while the impact of expansionary monetary policy in the US will be limited by the inflationary impact of rising oil prices, it said.
“The large trade deficit of the United States is likely at some point to be tackled through exchange rate movements, through a devaluation of the dollar,” said Mr Carlos Fortin, Unctad’s Deputy Secretary-General.
That would “produce immediately exchange rate instability and generally financial instability”, he told journalists, warning of a further knock-on impact on global trade with a potential rise in protectionism.
Mr Fortin predicted that a devaluation would prompt Asian countries to withdraw their capital from the US and to buy assets in other denominations, notably the euro. “There is very serious cause for concern about the sustainability of the situation,” he added. — AFP
