June 19, 2007 (LBO) – The International Monetary Fund has said it is changing rules of global currency management effectively forcing countries with tighter policies to adjust, as imbalances in the United States continue to build up. “If investors become suddenly unwilling to hold U.S. financial assets at prevailing exchange rates and interest rates, this could lead to an abrupt change, and could cause global financial market disruptions as well as an economic downturn.
“This risk is not imminent, but if it materialized the consequences would be serious.” IMF Managing Director Rodrigo Rato, in remarks published Monday said a new principle has been added to existing rules on exchange rate intervention: “A member should avoid exchange rate policies that result in external instability”.
His remarks comes at a time when many developing countries are learning the virtues of good macro-economic management and countries like China and India as well as other export oriented East Asian nations, are building up huge foreign currency reserves.
But these monies have been flowing back largely to the United States, feeding a US government budget deficit and a consumer boom and making it difficult for the Federal Reserve to run its o