The devaluation of US dollar and International Intervention

At 5th of July, IMF announced that IMF has an intention to intervene to stabilize international currency market if value of US dollar sharply dropped.

IN the interview with The Financial Times of British daily papers, Horst Kohler, the president of IMF told “IMF is usually careful on the intervention, but nonintervention policy may not always the right answer under the circumstance US dollar devaluates and the market falls in chaotic situation”

US dollar to Euro was devaluated by 12% reflecting the increase in current account deficit and unstable US economy. The last international cooperation to stabilize currency rate was at the time when Euro was devaluated in September of 2000.

Horst Kohler, the president told “ US dollar has been revaluated until now, so it is desirable for US dollar to devaluate, and Euro to revaluate” and added “ for economic growth and demand for capital, Europe can’t be an alternative of US, so US dollar is not estimated to devaluate sharply” He warns that the most dangerous matter is an exaggeration of an issue under the unstable financial market, and the exaggeration can be a prediction of self-realization.

He mentioned that IMF pays attention carefully on present unstable world economy not to underestimate the situation. If the possibility of default of obligation in new market such as Brazil Turkey etc combines with the weakness of developed countries, it will result in worst scenario. He estimated possibility of 20%. He told, “ Capitalism is the best system, but it should be equipped with morals.” and added “ In private sector, particularly, managers should act with responsibility.”

Eun-Taek Hong euntack@donga.com