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Warning on US/EU interest rate gap and fund flows

Thursday, November 15th 2007 - 20:00 UTC
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The US dollar's weakness has benefits for global imbalances, but fund inflows to the United States could shrink if the gap between U.S. and Euro-zone interest rates reverses, warned Bank of Japan board member Atsushi Mizuno.

Mizuno who has proposed raising Japanese interest rates since July, also said that in a country with little room to cut rates, such as Japan, monetary policy should take into account the need to act preemptively against asset bubbles, according to a text of remarks of his speech to a corporate pension fund association. Mizuno said central banks around the globe are making efforts to reduce excess liquidity while monitoring their countries' economic fundamentals. "For financial markets to stabilize again in the long run there needs to be a gradual reduction of global excess liquidity and an appropriate re-pricing of credit products" said using a terminology commonly used by US Secretary of the Treasury Henry Paulson. On currency market moves, Mizuno said falls in the dollar's trade-weighted value have helped improve global imbalances by boosting U.S. exports and supporting the country's, a benefit he described as "underestimated." "But there is also concern in financial markets over the risk of sharp dollar falls," Mizuno added underlining that "we need to be mindful of the risk of long-term fund flows into the United States decreasing and causing problems financing the U.S. current account deficit" if Euro-zone interest rates exceed rates in the US. Currently Euro rates stand at 4% and in the US at 4.5%. The dollar has recently dropped against other major currencies on concerns that the U.S. housing sector slump and lingering credit problems could hurt the broader U.S. economy. The BOJ kept its key policy rate unchanged at 0.5% for a ninth month on Tuesday, with the nine-member board again rejecting a proposal by Mizuno to hike rates to 0.75%. Mizuno has insistently argued that Japan's economic conditions have improved enough to tighten credit.

Categories: Economy, International.

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