The head of the International Monetary Fund said on Friday the pace of the recovery in the U.S. economy remains sluggish but he does not believe there will be a double-dip recession.
IMF managing director Dominique Strauss-Kahn said that capital flows to emerging markets reflected the positive outlook for those economies but warned that they can destabilize currencies and asset prices.
He noted China's economic stimulus is helping to rebalance its economy toward relying more on domestic demand but it still needs to let its currency rise over time.
In October, the IMF raised its U.S. growth outlook to 1.5 percent in 2010 but Strauss-Kahn said that forecast could be on the pessimistic side.
Our forecast has that, not only in the United States but also for the rest of the world, 2010 will be a year of recovery, Strauss-Kahn told a news conference in Singapore where he was attending an Asia Pacific Economic Cooperation (APEC) meeting.
I must say, in some respects, we had been a little pessimistic because growth has resumed a little earlier than expected, by one quarter or so.
He said the dollar had remained resilient throughout the global crisis and will remain as the reserve currency of the world.
I don't believe the role of the dollar will change for the coming months and years, Strauss-Kahn said.
But he said most Asian currencies were undervalued and reiterated calls for the Chinese yuan to be revalued.
China's economy in the coming years will be focused on domestic growth and the value of renminbi will have to be increased.
HOT MONEY FLOWS
In this year's annual lecture at Singapore's central bank later in the day, Strauss-Kahn said policymakers had a range of tools at their disposal to address the adverse side-effects of increasing fund flows to emerging markets.
They include exchange rate appreciation, tighter fiscal policy, and, where appropriate, lower interest rates. In addition, macro-prudential instruments can limit the risk of asset price bubbles. Market-based controls on capital inflows can help reduce the volatility of such flows, he said.
He noted that those measures were costly and tended to lose their effectiveness over time.
Strauss-Kahn's comments reflect concern among policymakers in some emerging markets that the inflow of hot money could create asset price bubbles and boost their currencies to levels that are uncompetitive and would undermine exports.
Earlier this week, Taiwan imposed capital controls by banning foreign funds from investing in time deposits in a move that appeared to be aimed at deterring bets on currency appreciation. Brazil last month announced a 2 percent tax on foreign investment in stocks and fixed-income securities to limit the strengthening of the real.
Several central banks in Asia have been intervening in foreign exchange markets to calm the ascent of their currencies.
(Additional reporting by Kevin Yao, Saeed Azhar and Jan Dahinten; Editing by Toby Chopra)