US May Trigger Currency War
Finance ministers from the Group of 20 nations struggled to agree on how to prevent a currency war at the weekend, with the United States switching tack to focus on a way to rebalance global trade.
The US is reportedly planning to shell out $850 billion to boost its economy, which many countries fear, will invariably devalue the dollar and make goods manufactured in America cheaper than those made in other countries like China.
With China resolutely refusing to allow the Yuan to rise more quickly, the US shifted the debate on the first day of the G20 summit to address trade imbalances, the root issue behind exchange rate clashes.
Timothy Geithner, the US Treasury secretary, told G20 members they should commit to specific trade caps, allowing surpluses and deficits on their current account, the broadest measure of trade in goods and services, to be no more than 4 per cent of Gross Domestic Product.
US will not engage in dollar devaluation, says Geithner.
China’s current account surplus was 5.9 per cent in 2009, having almost halved from its peak of 10.6 per cent in 2007.
The US, by contrast, had a current account deficit of 3 per cent last year.
In a letter to the G20, Mr Geithner called for a “co-operative effort†on the issue, but said there would have to be “some exceptions†for countries that imported large quantities of raw materials.
The US plan was seen as a way to side-step a direct confrontation over currencies. It was backed by the UK, Korea, Australia and Canada, but immediately opposed by large exporters such as Japan and Germany.
Rainer Bruederle, the German finance minister, rejected a “command economyâ€Â approach, while Yoshihiko Noda of Japan said “setting numerical targets would be unrealisticâ€.
India also said the trade caps would be hard to work out, while Russia said there would be no numerical limits set in the summit’s final statement.
Mr Geithner also called for G20 countries to refrain from “either weakening their currency or preventing the appreciation of an undervalued currencyâ€.
Mr Geithner, who also called for the IMF to monitor the G20’s commitments, added: “G20 advanced countries will work to ensure against excessive volatility and disorderly movement in exchange rates.â€
Guido Mantega, the Brazilian Finance minister, who was not at the G20 summit, also revealed that Mr Geithner had telephoned him to reassure him that the US had no intention of allowing the dollar to weaken further.
“He guaranteed US policy is not to weaken the dollar, on the contrary, it is to strengthen the dollar,†said Mr Mantega.
“He said the impact of the Fed policy was being overestimated. It is difficult, if you weaken the dollar and want the Chinese to let the Yuan appreciate,†he added.
Mr Mantega’s comments helped move the dollar up against the euro, from $1.3918 to the euro to $1.3895, before weakening later in the day. The dollar also steadied to 81.28 against the Japanese yen.
However, as the first day of meetings closed, there was little sign that currency issues would be resolved.
With scepticism growing that the G20 was a focused enough forum to iron out global economic problems, Lee Myung-bak, the South Korean president who is hosting the summit, warned ministers that if they did not reach a compromise “we may not operate bus, train or aeroplane services to take you back homeâ€.
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