The world economy has lived through “an earthquake” in financial markets and the aftershocks could include an abrupt fall in the dollar, protectionism in Europe and crisis in emerging economies, the head of the International Monetary Fund (IMF) said yesterday.

In his valedictory speech before stepping down as the IMF’s managing director, Rodrigo de Rato said that the global economy could be at a turning point and the risks to growth had become much more serious over the past six months.

Although the United States was not expected to suffer a recession and emerging economies were set to enjoy stable growth, uncertainty over the future had risen, he said.

“The turbulence in the credit markets is a warning that we cannot take the benign economic environment of recent years for granted,” Mr de Rato said. Until now, exchange rates had moved in an orderly fashion, “but there are risks that an abrupt fall in the dollar could either be triggered by, or itself trigger, a loss of confidence in dollar assets”, he said.

Eurozone economies that in turn suffered a relatively strong currency could see their growth prospects punished, he said, encouraging pressures for protectionism to rise.

If financial markets conditions deteriorated and demand from developed economies weakened, he said that some emerging economies that relied on external financing to fund their current account deficits “could be tipped into crisis”. Mr de Rato told central bankers that they could not cut simply cut interest rates to deal with these problems.

Friday’s 366-point plunge on the Dow Jones industrial average yesterday sparked a fresh sell-off in London, with the FTSE 100 dropping 68.6 points to close at 6,459.3. It recovered in afternoon trading as stocks picked up on Wall Street amid volatile conditions. Despite Mr de Rato’s warning, the dollar enjoyed its biggest one-day rise against sterling for three months. The pound fell below $2.026 after rising as high as $2.0530. The dollar swung wildly against the euro, which rose to a new record of $1.4348 before falling back by more than two cents.

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