The International Monetary Fund is warning that the U.S. dollar could be in for a fall, taking the world economy with it.

An IMF report released yesterday said, “Directors indicated that the size of the U.S. external current account deficit did not appear sustainable in the longer term and that it raised concerns that the dollar might be at risk for a sharp depreciation, particularly if productivity performance proved disappointing. A sudden correction in the current account deficit was seen as possibly having adverse effects on the United States and the rest of the world economy.”

Nevertheless, the IMF generally commended the U.S. authorities for implementing sound fiscal and monetary policies over the past decade, which provided a strong foundation for the longest U.S. economic expansion on record. It noted that the recent slowdown has been more rapid than expected, and that there remains considerable uncertainty surrounding its future.

The IMF observed, “Whether economic activity picks up in the second half of 2001 or remains sluggish for an extended period depends on a number of interrelated factors, including how consumer and business confidence evolve and affect spending, and whether the rapid rate of underlying productivity growth seen in the second half of the 1990s is sustained.”

The IMF also expressed concern about the decline in personal saving and rise in household and corporate debt levels in recent years. It cautioned that if U.S. productivity growth turned out to be far weaker than the growth rates experienced since the mid-1990s, the economic slowdown could be prolonged, adversely affecting household and business balance sheets.

It also observed that the overall condition of the U.S. banking sector remains healthy, although banks had seen some deterioration in loan quality in 2000 and the first half of 2001. It cautioned against the risks associated with the use of off-balance sheet instruments. “The slowdown in economic activity will likely result in some further deterioration in credit quality and bank profitability. However, currently high profit and capitalization levels are expected to cushion the impact of these negative developments, allowing banks to weather the economic slowdown without undue difficulties.”