As the International Monetary Fund’s annual meeting began in Washington, policy makers expressed concern that efforts to boost exports by embracing weaker currencies threatened to provoke protectionism and trade imbalances at a time when economic growth is already slowing. China was again the target of criticism as foreign officials called the yuan undervalued and pushed for its rise to be accelerated.
“This is a crucial time that we need to address the commitment of our leaders to free trade, that we avoid protectionist measures,” Canadian Finance Minister Jim Flaherty told reporters. U.S. Treasury Secretary Timothy F. Geithner said “global rebalancing is not progressing as well as needed to avoid threats to the global economic recovery.”
Currency intervention by nations from Japan to Brazil and the prospect of easier monetary policy by the Federal Reserve are roiling foreign-exchange markets. The dollar today dropped below 82 yen for the first time since 1995, and the euro yesterday passed $1.40 for the first time in eight months.
“We want peace not war,” French Finance Minister Christine Lagarde told reporters. Bank of France Governor Christian Noyer said colleagues need to “foster confidence, not war” on currencies and that excess volatility harms expansion.
Better Coordination
Lagarde said France wanted better coordination and more diversification when it came to currencies, without offering specific steps. Brazilian Finance Minister Guido Mantega suggested the Group of 20 strike a deal akin to 1985’s Plaza Accord, which successfully weakened the dollar.
Officials have a “genuine desire” to resolve disputes over exchange rates, U.K. Chancellor of the Exchequer George Osborne said. “We do need to move toward market orientated rates that reflect fundamentals.”
Most ministers nevertheless declined to offer concrete solutions other than for China, preferring instead to complain about recent trading. Luxembourg Prime Minister Jean-Claude Juncker, who chairs a panel of euro-area finance ministers, said the euro is “too strong” and labeled the yuan “more than undervalued.”
Brazilian Central Bank President Henrique Meirelles said a currency agreement is unlikely in the short term and blamed recent gyrations on an excess of dollars generated by loose monetary policy in the U.S. and other industrial nations. That’s fuelling capital flows into emerging markets such as his.
Excessive Price
“Brazil cannot pay an excessive price for the fact it’s doing well while others are doing badly,” he said. “Brazil needs to take its measures to protect itself from these imbalances.”
Japanese Finance Minister Yoshihiko Noda said his government also remains ready to act on the yen when needed, although it doesn’t intend to return to the long-term, large yen selling of the past. Thai Prime Minister Abhisit Vejjajiva said today his cabinet will meet next week to consider ways to help exporters cope with the baht’s climb to a 13-year high.
Chinese officials are pushing back against calls for a weaker yuan.
People’s Bank of China Governor Zhou Xiaochuan said in Washington today that any change in the yuan needs to be gradual or risks hurting the world’s fastest growing major economy. While the currency today rose to the highest level against the dollar since 1993, it is still only about 2 percent higher than it was when China said in June it would make it more flexible.
U.S. Legislation
China faces U.S. legislation aimed at prodding to raise the value of the yuan, with Rhode Island Senator Jack Reed telling Bloomberg Television’s “Political Capital with Al Hunt” that the U.S. Senate may consider it in a lame-duck session. China today faced U.S. criticism for ignoring pledges made under last year’s global-warming accord and calls to release jailed dissident Liu Xiaobo after he won the Nobel Peace Prize.
On exchange rates, Russian Deputy Finance Minister Dmitry Pankin added to the tension by saying Brazil, Russia, India and China have united to show “rather strong resistance” to attempts to make “any harsh appraisal” of currency controls.
Cautioning that using currencies as a tool of economic policy can “lead to very bad situations,” IMF Managing Director Dominique Strauss-Kahn said his staff is working on “spillover reports” to highlight how the actions of one economy affect others.
Global Impact
Investors and economists today said further exchange-rate volatility could hurt the world economy.
In an article in the Financial Times, billionaire investor George Soros said he shares “the growing concern about the misalignment of currencies” and that talk of a currency war “is not far off the mark.”
New York University Professor Nouriel Roubini, who predicted the 2008 credit crisis, said in Washington that the euro at $1.40 is “painful” for the euro area, and that it may relapse into a recession.
To contact the reporter on this story: Simon Kennedy in Washington at skennedy4@bloomberg.net
source: www.bloomberg.com/news
