Finance leaders try to avoid currency clash

WASHINGTON – Global finance chiefs sought on Friday to prevent rising tensions over currency valuations from derailing a fragile economic recovery, as policy makers stressed they must work together to find ways to rebalance global growth.

However, the finance leaders struck no deal on currencies but their IMF communique sought to defuse these escalating tensions by acknowledging both sides’ points of view. Not only did it underline the need for scrutiny of rich countries, it added language sought by Washington for the IMF to speak with greater ‘candor’ in advising countries on economic policy, potentially giving the fund more clout when dealing with China’s yuan.But it laid out no concrete actions for addressing the problems of unbalanced global growth that underlies the mounting stress in foreign exchange markets.US Treasury Secretary Timothy Geithner said there is a direct link between planned reforms at the IMF designed to give emerging powers a greater voice and foreign exchange rate policies, and said if emerging markets want more influence they must release their grip on tightly managed currencies.IMF chief Dominique Strauss-Kahn put it slightly differently: ‘You cannot be at the centre and be a free rider.’Strauss-Kahn said he hoped to get an agreement possibly within weeks on giving emerging countries more IMF voting power, which would be in time to meet a deadline of the Group of 20 summit next month in Seoul.Ministers from the Group of 20 nations repeated a call for export powerhouses, such as China, to spend more at home so indebted countries, like the United States, can rebuild their finances without risking a still-fragile global recovery.Officials are worried a weak US dollar and relatively strong currencies elsewhere could push nations into a round of currency depreciations to help their exports.The dollar fell to a 15-year low against the yen on Friday after a US report of more job losses cemented expectations of a further loosening in an already-easy US monetary policy.The uneven pattern of global growth has seen US interest rates cut to nearly zero, driving capital into emerging markets and prompting talk of a ‘currency war’. At the same time, China has allowed its yuan currency to rise only slowly.’I’m not in the mind or in the mood for war, this is totally inadequate, inappropriate and unnecessary,’ French Finance Minister Christine Lagarde said.The United States urged the International Monetary Fund to act as a more forceful global overseer. Finance chiefs were working toward giving the fund a redefined role, possibly by the time G20 political leaders meet in Korea in November.’It is ultimately the responsibility of countries to act, but the IMF must speak out effectively about challenges and marshal support for action,’ US Treasury Secretary Timothy Geithner told a semiannual meeting of the International Monetary Fund and the World Bank.Taking a jab at China, Geithner complained that foreign exchange intervention by countries trying to keep undervalued currencies from appreciating was threatening the global recovery.China pushed back by saying it will move ahead with exchange-rate reforms at its own pace.’We still think China needs a market-based exchange rate regime,’ China’s central bank governor, Zhou Xiaochuan, said. ‘I think the difference is that for China, we view it as gradualism, a gradual way, rather than shock therapy.’Members of the Group of Seven rich industrial nations were set to discuss economic growth and currencies over dinner on Friday.The chairman of the euro zone finance ministers, Jean-Claude Juncker, said part of the problem was a lack of a suitable forum for bringing currency negotiations to a point.’In the G20 framework there are too many people and too many interests to be able to find a currency arrangement,’ he told Reuters. “The ideal forum would be G7 plus China.”The G7 is comprised of the Britain, Canada, France, Germany, Italy, Japan and the United States.Japan last month intervened in foreign exchange markets for the first time in six years to stem a rise in the yen. Many emerging economies have taken steps to try to slow a rising tide of inflows of foreign capital.Canadian Finance Minister Jim Flaherty said it was vital G20 countries resist protectionism. He also said China must meet its commitment to let the yuan rise.”I would expect that we’d arrive at a consensus with respect to the necessary direction,” he said of this weekend’s discussions about currencies.GLOBAL APPROACHBrazilian Finance Minister Guido Mantega, who earlier last week doubled a tax on foreign funds flooding into his country’s bond markets, called for a sweeping new currency deal.”I think in the G20 meetings we can arrive at an agreement something like the Plaza Accord,” he said, referring to a 1985 agreement among the world’s then trade powers to push down the dollar’s value. “I think we can achieve agreement about how to manage the appreciation of currencies in the G20 meetings.”Other officials said countries should let market forces determine currency values.G20 nations have committed to a process in which the IMF helps them coordinate on policies to rebalance global growth, but cooperation has frayed because of currency tensions.Zhou said China was pursuing policies to boost demand at home, including improvements to its social security system, allowing Chinese consumers to save less and spend more.The yuan hit its highest closing level on Friday since a landmark revaluation in July 2005, possibly a sign Beijing is sensitive to the growing demands to let the currency rise more rapidly.Donald Straszheim, Senior Managing Director for China research at ISI Group in Los Angeles, was sceptical that the G20 would make much ground in pushing China on the yuan.”Plaza Accord-style talks is truly a non-starter,” he said, because it would imply Beijing yielding some of its sovereignty. “Zhou said again this morning essentially: our currency, our business, our pace.”Expectations the US Federal Reserve will further ease monetary policy – bolstered by Friday’s report showing the US economy unexpectedly lost 95 000 jobs last month – has pushed the dollar to an 8-1/2-month low against a basket of currencies.Until rich nations find their footing, emerging markets will be the strongest source of global growth. The IMF expects emerging markets to grow at three times the pace of advanced economies next year.Those countries are clamouring for greater decision-making power at the IMF, commensurate with their growing economic prowess. This has been another thorny issue for G7 and G20 leaders who have yet to agree on how exactly to divvy up power when no one wants to relinquish their own position.The United States thinks Europe ought to give up some of its seats on the IMF executive board, while European countries have proposed a seat-sharing rotation. IMF officials are hopeful progress can be made toward resolving reform issues by the time G20 leaders gather in Seoul next month. – Nampa-Reuters