And you thought the dollar was bad now?

IMF brushes off drop of U.S. dollar to record lows

JIDDA: The International Monetary Fund shrugged off the tumble of the U.S. dollar to record lows against other currencies, saying that global foreign-exchange markets were tracking economic fundamentals.

The dollar fell to fresh lows against the euro and a basket of currencies recently after the Group of Seven failed to address its decline, suggesting to the market that it would not step in to prop it up.

The growing likelihood that an expected U.S. Federal Reserve Board interest rate cut this week would not be the last sent the dollar to new lows against the euro and a basket of currencies Friday.

"The important thing on currencies is certainly that we avoid abrupt changes and that the recent moves in currencies are in line with fundamentals," the managing director of the IMF, Rodrigo Rato, said Saturday.

As in a G-7 communiqué Oct. 19, Rato explicitly mentioned only one currency, the yuan, in his comments.

China and other Asian states should introduce greater flexibility of exchange rate regimes to smooth out global trade imbalances, Rato said.

The yuan climbed to a post-revaluation high against the dollar recently as international pressure mounted on China to allow the currency float freely.

"Some Asian currencies would help their countries more by reflecting the movements of supply and demand better," Rato said, explaining that he was referring to the yuan.

"Global imbalances, for one, will not be solved only on exchange rate movements," he said.

The dollar has been bruised by weak economic data and losses at big financial institutions in the United States from a global credit crisis, triggered in July by a meltdown in mortgages.

The impact of the credit crunch on the world economy would be bigger in 2008 than this year and would hit the United States the hardest, Rato said.

"The consequences of the crisis have not yet been seen fully," Rato said.

"There's going to be a mild slowdown in the world economy. It will be felt more in the United States and a little bit in Europe. But the rest of the world economies - to now we don't see strong consequences," he said.

Rato was in Jidda as Gulf finance ministers and central bankers met to review the 2010 deadline for creating a single currency in the top oil-exporting region. Gulf Arab rulers will decide in December whether to delay monetary union among six oil producers that are divided over how to respond if more U.S. interest rate cuts test currency pegs to the sliding dollar.

With a widely anticipated delay prompting investors to bet on the appreciation of dollar-pegged Gulf currencies, the six states agreed to keep foreign-exchange policy unchanged, although each would steer its own course on interest rates.

"There is a margin for each state to follow monetary policies that correspond to its domestic conditions," Hamad Saud al-Sayyari, the governor of the Saudi Arabian Monetary Agency, said after the talks.

Original article posted here.