October 8, 2010 / 4:28 AM / 9 years ago

World finance leaders seek to avoid currency clash

WASHINGTON (Reuters) - Global finance chiefs sought on Friday to prevent tensions over currency valuations from derailing a fragile economic recovery, and stressed they must work together to find ways to rebalance global growth.

Governor of People's Bank of China Zhou Xiaochuan (R) attends the annual IMF-World Bank meetings plenary session in Washington, October 8, 2010. REUTERS/Yuri Gripas

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.

The International Monetary Fund, heading into evening talks with the Group of Seven rich countries, was seeking support for a more active role in monitoring the world’s major economies.

Officials worry that a weak U.S. 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 U.S. report of more job losses cemented expectations of a further loosening in an already-easy U.S. monetary policy.

The uneven pattern of global growth has seen U.S. 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 IMF 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.

The IMF’s managing director, Dominique Strauss-Kahn, sought support for a “systemic stability initiative” to keep a closer watch on the largest economies and ensure they do not put the world in danger of financial crisis again.

He seemed to be winning some allies. Svein Gjedrem, a Norwegian central bank governor, speaking on behalf of Nordic and Baltic countries, said he supported developing an IMF-coordinated framework.

“In the post-crisis period, IMF surveillance will be of growing importance and acquire a greater role in preventing crises, both in individual countries and global,” he said.

U.S. Treasury Secretary Timothy Geithner called on the IMF to “speak out effectively about challenges and marshal support for action.”

Taking a jab at China, Geithner complained that foreign exchange intervention by countries trying to keep undervalued currencies from appreciating threatened 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.”

Canadian Finance Minister Jim Flaherty said he expected advanced economies to put up a united front in prodding China and other countries to allow more flexible currency moves, but said no broad currency accord would be reached.

“I certainly don’t anticipate there’s going to be any unanimous agreement here in Washington on currencies,” he told a news conference.

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.

GLOBAL APPROACH

Brazilian Finance Minister Guido Mantega, who earlier this 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.

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 demands its currency should rise faster.

Donald Straszheim, senior managing director for China research at ISI Group in Los Angeles, was skeptical that the G20 would make much ground in pushing China on the yuan.

“Zhou said again this morning essentially: ‘our currency, our business, our pace’,” he said.

Expectations the U.S. Federal Reserve will further ease monetary policy — bolstered by Friday’s report showing the U.S. economy unexpectedly lost 95,000 jobs last month — has pushed the dollar to an 8-1/2-month low against a basket of currencies.

Additional reporting by Reuters IMF team; writing by Emily Kaiser and Glenn Somerville; editing by Tim Ahmann and Leslie Adler

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