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Bankers: U.S. overheating potential danger to world economy

BASEL, Switzerland (AP) -- Record trade imbalances between major industrial countries must sooner or later bring a weaker dollar, while a potential overheating of the U.S. economy poses a danger to the world economy, says a central bankers' report released Monday.

After months of debate over how to stabilize the world economy, it is time to put measures in place, the Basel-based Bank for International Settlements said in its 185-page annual report."This must be the principal task of the international community over the next few years, and it will not be an easy one," said the BIS, regarded as the central banker's central bank.

But although further turmoil can't be ruled out, it said that "the worst of the crisis in emerging and financial markets seems to be over."

Trade imbalances "must at some point imply a lower dollar and an appreciation in the yen and the euro," the BIS report said.

The BIS said Japan should concentrate its policy on bringing the country's recession to an end rather than limiting its trade surplus.

It said the "downside potential for the global economy is obvious" if the dollar weakens against the euro and the yen before the Japanese and European economies recover.

The report said U.S. interest rate cuts made last year to calm turbulent world financial markets may have to be reversed.

"While the global financial turbulence of last autumn contributed in some measure to the decision to lower interest rates, the previous run-up in equity prices, in association with the robust growth of credit, might have suggested that higher rates were called for," the report said.

The possibility that the U.S. economy will overheat and trigger a stock market slump as investors anticipate a future recession poses a "great danger" to the world economy, it said.

The bankers identified excess industrial capacity in Asia and the United States, questions over the solvency of financial institutions in Asia, and overvalued stock markets in the major economies, as other potential areas of concern.