CHINA / National

EU backs China's gradual yuan moves
Updated: 2006-04-04 07:36

Forecasting Difficulties

Looking at U.S.-European economic relations, the commission document said it is "unclear" whether the dollar will continue to recover or weaken against the euro this year. While interest rates and economic growth remain in the dollar's favor, the end of the phase of U.S. interest-rate increases could benefit the euro, the document said.

Some Asian governments, flush with dollars in their reserves, may let their currencies strengthen this year as an insurance policy against future crises, said the document, prepared by the commission's economics department and dated March 17.

Also weighing on the currency markets is the risk of a widening U.S. current-account deficit along with increasing surpluses in Asia, the document said. The result may be a "disorderly" realignment of the world's major currencies.

"There remains the risk that, as imbalances continue to widen, the likelihood of a disorderly correction increases," the document said. "Even if a disorderly correction is the less likely scenario, it may involve very large costs."

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