WASHINGTON (AFX) - The US should tighten its budgets to help ease the risk of a rapid drop in the dollar, which could jeopardise global economic recovery prospects, the IMF said.
The risk of a rapid dollar depreciation due to growing current account deficits "underscores the importance of boosting US saving -- especially through disciplined fiscal policies," the IMF said in its annual review of the US economy.
The report was released by the Treasury Department.
The IMF said the fiscal outlook "has deteriorated markedly over the past year," thanks to the economic slowdown, tax cuts, and increased spending in the aftermath of the Sept 11 attacks.
Medium-term fiscal projections by the US government "could be optimistic," the IMF also said, noting that the Bush administration's budget proposal would squeeze spending in non-defence areas "to an extent that could be difficult to sustain, especially given the apparent weakening of fiscal discipline in recent years."
An adjustment in the large and growing US current account deficit is needed, the IMF noted, and the risk remains that this adjustment is disorderly.
"Less orderly adjustments can also be envisaged, including through a sudden reversal of investor sentiment and capital flows, and rapid dollar depreciation," the IMF said.