Foreign exchange markets tracking fundamentals: IMF

The International Monetary Fund shrugged off the dollar's tumble to record lows against other currencies on Saturday, saying global foreign exchange markets were tracking economic fundamentals.
The US dollar fell to fresh lifetime lows against the euro and a basket of currencies last week after the Group of Seven failed to address its decline at a meeting last weekend, suggesting to the market it would not step in to prop it up.
The growing likelihood that an expected US Federal Reserve interest rate cut next week would not be the last sent the dollar to fresh new lows against the euro and a basket of currencies on 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," IMF Managing Director Rodrigo Rato told reporters in Saudi Arabia.
As in a G7 communiqué last week, Rato explicitly mentioned only one currency, China's yuan, in his comments to reporters in the Saudi port city of Jeddah. 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 last week 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 he was referring to the yuan.
"Global imbalances, for one, will not be solved only on exchange rate movements," he said. The US dollar has been bruised by weak economic data and losses at the country's big financial institutions from a global credit crisis, triggered in July by a meltdown in US mortgages.
The impact of the global 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.