Surging Dollar Boosts Europe, Japan as U.S. Slows, IMF Says

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(Bloomberg) -- The strengthening dollar is boosting growth in the euro area and Japan while taking some steam out of the U.S. recovery, the IMF said in its latest forecast.

The International Monetary Fund left its projection for global growth in 2015 unchanged from three months ago at 3.5 percent, according to its World Economic Outlook released Tuesday. Underneath the stable forecast, however, the IMF depicts a global economy being reshaped by swings in currency markets and the drop in oil prices.

The Washington-based crisis lender cut its U.S. expansion forecast by 0.5 percentage point to 3.1 percent, still the fastest among major developed economies. The Japan growth outlook increased to 1 percent from 0.6 percent and the euro area is projected to expand 1.5 percent as weakening currencies provide a “welcome boost,” the IMF said.

Emerging markets are showing their own mixed forecasts, with growth projected to slow to 4.3 percent from 4.6 percent in 2014, the fifth straight annual decline and the same forecast as in January.

The figures show India will grow more quickly this year than China for the first time since 1999, according to data on the fund’s website. The IMF predicts India will expand at a 7.5 percent rate, up 1.2 percentage points from the January forecast. India is benefiting from policy reforms by Prime Minister Narendra Modi’s government, a pickup in business investment and lower energy prices, the fund said.

China ‘Excesses’

Meanwhile, China is expected to grow 6.8 percent this year, unchanged from January’s forecast. The world’s second-biggest economy is slowing as “previous excesses in real estate, credit and investment continue to unwind,” the IMF said.

Brazil will contract 1 percent in 2015, compared with projected growth of 0.3 percent at the start of the year, the IMF said. In cutting its forecast, the fund cited “stubbornly weak” private-sector sentiment, fallout from the investigation into allegations of corruption at Petroleo Brasileiro SA, and efforts to curb public spending and inflation.

The IMF projects an even deeper contraction in Russia this year than it did in January, with output expected to shrink 3.8 percent.

While the 50 percent drop in oil prices since June is hurting Russia, the fund estimates the decline will boost global output between 0.5 percent and 1 percent by 2016, depending on how it’s passed through to consumers and businesses. Uncertainty has increased about the path of oil prices, the fund said, pointing to volatility levels implied by derivatives markets.

Winners, Losers

“Large movements in relative prices, whether exchange rates or the price of oil, create winners and losers,” said Olivier Blanchard, the IMF’s chief economist.

The IMF said short-term downside risks to its outlook include a faster-than-expected rebound in oil prices that undercuts gains for households and firms. A further “sizable” strengthening of the dollar could hurt holders of U.S.- denominated debt in emerging markets, while the threat of low inflation or falling prices in advanced economies remains an “important concern,” the IMF said.

As negotiations for Greek economic reforms drag on, a further “crisis” that would unsettle financial markets can’t be ruled out, Blanchard said at a briefing Tuesday.

“An exit from the euro would be extremely costly for Greece, would be extremely painful,” he said, after stating the IMF is working on and hopes to come to an agreement with Greece. That said, “the rest of the euro zone is in a better position to deal with a Greek exit” than it has been previously, Blanchard said.

Dollar’s Rise

The greenback has appreciated 6.8 percent this year after an 11 percent jump in 2014, according to the Bloomberg Dollar Spot Index. Blanchard said Tuesday that the currency’s move has given a net boost to the world economy, and the report contained IMF simulations showing exchange-rate shifts since August may boost global output by 0.5 percent by next year.

The strong dollar is blunting the reemergence of the U.S. as the world’s primary growth engine as Federal Reserve officials led by Chair Janet Yellen consider when to raise their benchmark lending rate. The global economy risks becoming mired in a “mediocre” recovery if policy makers don’t take bolder steps to boost growth, IMF Managing Director Christine Lagarde said in a speech ahead of this week’s meetings of central bankers and finance ministers in Washington.

With headline inflation negative in Europe and weak in Japan, the IMF expects a “protracted divergence” in the monetary policies of the main advanced economies. Both the euro and yen have declined against the dollar as the European Central Bank and Bank of Japan purchase assets to boost the supply of money in their economies.

The IMF’s forecast of 3.5 percent global growth this year compares with 2014 expansion of 3.4 percent.

To contact the reporter on this story: Andrew Mayeda in Washington at amayeda@bloomberg.net

To contact the editors responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net Scott Lanman, Brendan Murray

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