MercoPress. South Atlantic News Agency

US weak dollar could generate “abrupt and global correction”

United States can't depend on a weak dollar as the only instrument to soften its growing trade deficit, it should rather contain outlays and increase savings, otherwise the world economy could experience a severe shock, warned the United Nations Department of Economic and Social Affairs.

If the US does not address these additional challenges, the world economy could be exposed to an "abrupt and global correction" insists the report released this week.

A declining dollar theoretically makes US exports cheaper and imports dearer, clearly helping to recover the US economy.

But the US dollar has been falling now for the third consecutive year, having reached a historic minimum vis-à-vis the Euro in 2004, and some economists believe this is a deliberate policy of the President George Bush administration with the purpose of reverting the trade gap.

High oil prices and imports have proved the theory, so far, impractical and the trade deficit in 2004 reached 650 billion US dollars equivalent to 5% of GDP.

The ever growing US trade deficit was counterbalanced last year with surpluses in Asia, Japan and the European Union, indicates the UN Economic and Social Affairs Department, and therefore had a minimum impact on the world economy.

But the situation could lead to "a harmful abrupt and global correction in 2005, since it seems unlikely that the depreciated US dollar will be sufficient to reduce global imbalances at sustainable levels in an orderly manner" warns the report.

Similarly with the growing US budget deficit which in fiscal 2004 reached 412,5 billion US dollars and is forecasted to total 427 billion in 2005 equivalent to 3,5% of GDP.

Budget deficits are financed by foreign investors purchasing US Treasury bonds.

Afghanistan and Iraq war efforts have cost US tax payers an estimated 300 billion US dollars so far. The Bush administration this week requested Congress an additional 80 billion US dollars with the same purpose.