Rato said he saw a "downward bias" on the short-term risks to the global economy and warned that the oil market remained "highly susceptible" to shocks as excess capacity was very low.

On the upside, strong corporate balance sheets and wealth created by rising equities markets could lead to stronger than expected global domestic demand, he said in a speech to the Institute of International Finance meeting in Madrid.

"On the downside, the key risks include further exchange rate volatility, faster than expected rises in interest rates ... and extended weakness in the euro area and Japan," Rato, the International Monetary Fund's managing director, said.

"The continuing buildup of the large current account deficits in the United States, with counterpart surpluses and reserve accumulation concentrated mainly in emerging Asian markets, is a key concern. It is also a main source for many of the risks facing the global financial system," he said.

The US current account deficit -- which measures trade and investment flows -- widened more than expected in the fourth quarter of 2004 to a record $187.9 billion, the Commerce Department said last month.

Portfolio inflows largely destined for US bond markets, and originating increasingly from the official sector, especially central banks in Asia, had made the dollar's decline orderly, he said.

However, a larger than expected spike in US interest rates, due to inflationary pressure or a sharp reduction of foreign portfolio inflows into US fixed income markets, could bring about market corrections, he warned.