THE dollar lurched sideways on the foreign exchanges yesterday in what optimists hope will herald a smooth adjustment but pessimists fear could be the start of something nasty.

The US currency slid 1.4 per cent against the yen, but slipped only marginally and fitfully against other main currencies.

The imbalance threatening the world economy, all agreed at the IMF’s weekend meetings, is between America and China. The former’s imports top its exports by the largest margin in history. China has accumulated the biggest pile of currency reserves ever known in less time than it takes to train a doctor. To cajole China into resolving this syndrome by allowing the yuan to rise meaningfully, the IMF talked of the dollar needing to fall against Asian surplus currencies rather than just the people’s yuan. The dollar cannot move against the yuan more than the fingers in a glove without a specific order from Beijing. So it moved against the yen, which acted as both a proxy and a hint.

Japan’s recovery is still provisional, so sharp yen gains could still hurt. But the dollar fell below 104 yen at the start of 2005 so yesterday’s 114.5 yen is well outside the danger zone. Against sterling, the dollar was infinitesimally off in London, though more discernibly later in New York. It fell to a seven-month low against the euro. Unless the yuan rises by a large multiple of such movements, imbalances will be untouched.

And if the dollar starts rolling downhill, it could set off capital movements that would drive financial markets and commodity speculation into paroxysm. Officials hope for a tai chi dollar devaluation, not a kung fu collapse.

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