WASHINGTON (Reuters) - Finance ministers from the Group of 20 nations should send a clear signal to financial markets this week that they are coordinating policies and not embroiled in a “currency war,” the head of a global banking group said on Monday.
Institute of International Finance Managing Director Timothy Adams said that, without a unified message from a G20 meeting in Moscow this week to calm markets, exchange rate volatility will likely continue.
“Right now there seems to be a bit of a message void and that message void is filled by whoever has the microphone on a particular week,” said Adams, who served as a U.S. Treasury undersecretary for international affairs during President George W. Bush’s administration.
“I think markets are nervous about currency skirmishes because they feel like they are not getting clearly communicated signals from policymakers. If stage-managed clearly this week, policymakers could go a long way in explaining what they’re doing, how they’re doing it, and the possible effects.”
The Group of Seven rich nations are considering a statement this week during the G20 meeting in Moscow reaffirming their commitment to “market determined” exchange rates.
Tensions over currencies were prompted by Japan’s aggressive expansionary monetary policies, which have weakened the yen sharply, promoting concerns by Europe and the United States.
Adams dismissed the idea that current tensions over foreign exchange rates amount to a “currency war,” but rather “a slight skirmish” among countries.
“It is less to do with policymakers targeting the exchange rate and more about policymakers trying to implement policies to deal with domestic conditions,” he said. “Nonetheless, policymakers still need to cooperate and communicate how they are going about it, because markets are interpreting it as an effort to manipulate exchange rates.”
Adams said it was important that any G20 statements help to minimize potential currency volatility.
“There does seem to be some concern there is insufficient cooperation, communication, coordination among policymakers to ensure that policies minimizes exchange rate volatility,” he added.
In a policy letter to Russian Finance Minister Anton Siluanov, the IIF chief said it was also important for central banks to signal now how they plan to exit from the extraordinary easing that led to a surge in international capital flows.
“At some point, this period of easy money, low interest rates, quantitative easing will be reversed, central banks’ balance sheets will be drawn down,” Adams said.
Central banks in advanced economies have resorted to unconventional policies to revive growth and boost employment, cutting interest rates close to zero and flooded their banking systems with cash to restore confidence. The move has led to the weakening of their currencies, while a surge in capital flows into emerging economies by investors seeking to profit from higher interest rates has prompted their currencies to rise.
The IIF is the world’s largest international lobbying group for financial firms, with more than 450 members. It was the lead negotiator for private sector creditors during Greece’s private debt write-down last year.
In its policy letter ahead of the G20 meeting, the IIF said it was important that Europe avoid a perception of complacency in dealing with its debt crisis so as not to disrupt the weak global recovery. It also urged the United States and Japan to spell out credible medium-term fiscal plans.
The IIF also said unilateral regulation of financial services was increasing, which threatened to undo progress so far towards a more coordinated global system.
“This trend to a more territorial approach, especially ring-fencing assets, capital and liquidity, threatens to undo recent movement towards regulatory cooperation under G20 initiatives, but also to set back earlier achievements of cross-border cooperation that has helped fuel global economic growth,” he said.
“This would inevitably have a negative impact, not only on banks, but also on non-financial corporations engaged in global trade.”
Reporting by Lesley Wroughton. Editing by Chizu Nomiyama and Andre Grenon