International Monetary Fund Deputy Managing Director Agustin Carstens said that a high sustained current account deficit could trigger a rapid devaluation in the dollar.

The US current account deficit, which is the broadest measure of international trade and registered 5.5% of GDP in 2004, has already contributed to a significant drop in the greenback’s value in the last 18 months, Carstens said, though up until now it, “hasn’t put the world economic recovery in danger.”

“But if we continue along this path, there is a danger that investors force a brusque adjustment,” Carstens told a banking convention in the Mexican resort city.

A “rapid devaluation of the dollar would lead to higher interest rates and a contraction of world liquidity,” Carstens said.

Carstens said the US government must take measures, “to convince investors to continue channeling their investments in US assets,” namely by “fiscal consolidation.”

Carstens said a 2006 budget proposal that would cut the US fiscal deficit in half over four years would be a, “good step toward the sustainability of US debt.

“But it is crucial to put these proposals into practice with firmness and without delay,” he said.

Carstens also called on China to loosen its exchange rate. China’s yuan has been pegged at 8.28 to the dollar since 1994, which has kept Chinese exports to the United States cheap.

“Not only would this (loosening of currency regimes) contribute to a more ordered correction to world (trade) imbalances, but would also allow these countries a more ample margin in conducting monetary policy, “and facilitate the formation of more dynamic economies,” Carstens said.

Carstens said a rapid rise in interest rates would particularly affect emerging markets, whose “access to external financing would be more expensive and limited in amounts and terms.”

He also repeated the IMF’s view that eurozone, Japanese and Latin American economies need enact structural reforms, particularly the loosening of labor laws to make their economies more competitive.

Regarding growth prospects, Carstens said US growth will likely slow to “a more sustainable rate” in 2005, while the Japanese and eurozone economies will continue “below potential.”

Latin American economies, “should continue registering solid economic performance in 2005,” and he said the IMF estimates 2004 growth in Latin American exceeded 4.5%. (Market News International Inc.)