By Sonia Sirletti and Jeffrey Donovan
Sept. 4 (Bloomberg) -- The dollar will weaken and the U.S. risks seeing a crash of the currency unless it does more to control the deficit and reduce debt, said New York University Professor Nouriel Roubini, who predicted the financial crisis.
“If markets were to believe, and I’m not saying it’s likely, that inflation is going to be the route that the U.S. is going to take to resolve this problem, then you could have a crash of the value of the dollar,” Roubini said in an interview today in Cernobbio, Italy. “The value of the dollar over time has to fall on a trade-weighted basis, but not necessarily relative to euro and yen.”
Roubini said he didn’t see a risk of a dollar crash in the “‘short term.” The value of the U.S. currency relative to currencies such as the yen or the euro “cannot change too much compared to current levels because if the dollar were to weaken a lot and the euro strengthen a lot, that’s going to warp any chance for the European economy to recover, same argument as to the yen,” he said.
“Most of the adjustment of the dollar in the future has to occur relative to China, relative to emerging Asia and relative to some of the other commodity exporters in the world, whether these are advanced economies or emerging markets,” he said.
Foreign creditors need assurances that the U.S. will address its deficit, Roubini said.
“Unless in the medium term these issues of fiscal sustainability are addressed, and unless we mop up that excess liquidity from the financial system, eventually the financial markets and the foreign creditors of the United States might get more concerned about the sustainability of the U.S. fiscal deficit and about the U.S. being tempted to use the inflation tax as a way of resolving its private and public debt problems,” he said.
To contact the reporters on this story: Sonia Sirletti in Milan at ssirletti@bloomberg.net; Jeffrey Donovan in Rome at jdonovan26@bloomberg.net
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