Finance Chiefs Fail to Resolve Currency Spat as G-20 Splits

Leaders of the world economy failed to narrow differences over currencies as they turned to the International Monetary Fund to calm frictions that are already sparking protectionism.

Exchange rates dominated the IMF’s annual meeting as Treasury Secretary Timothy F. Geithner, People’s Bank of China Governor Zhou Xiaochuan and their counterparts split over whose policies are the biggest threat to the world economy on concern countries are relying on cheap currencies to aid growth. China was accused of undervaluing the yuan, while low U.S. interest rates were blamed by emerging markets for flooding them with capital. Brazil took aim at both the U.S. and China.

Finance ministers and central bankers pledged to improve cooperation, yet did little to show how they would alter their ways beyond agreeing to let the IMF study the matter. With the dollar down 11 percent against the yen since mid-June, compared with less than 3 percent versus the Chinese yuan, the focus turns to Group of 20 talks in South Korea in coming weeks to prove international policymaking isn’t in tatters.

“Policy makers seemed to be trying to diminish concerns about currency wars,” said Steven Englander, head of Group of 10 currency strategy at Citigroup Inc. in New York. “There did not seem any commitment to change behavior, however. There is little to suggest that the dollar’s direction is anything but down.”

Mantega’s ‘War’

The dollar rose 0.1 percent to 81.98 yen as of 8:15 a.m. in New York after earlier dropping to 81.39 yen, the lowest since April 1995. The U.S. currency was little changed against the euro and yuan.

Days after Brazilian Finance Minister Guido Mantega set the tone for the gathering by declaring a “currency war” was under way, officials meeting in Washington held their traditional battle lines. Geithner and European Central Bank President Jean- Claude Trichet were among those to signal irritation that China is restraining the yuan to aid exports even as its economy outpaces those of other G-20 members.

“Global rebalancing is not progressing as well as needed to avoid threats to the global economic recovery,” Geithner said. “Our initial achievements are at risk of being undermined by the limited extent of progress toward more domestic demand- led growth in countries running external surpluses and by the extent of foreign-exchange intervention as countries with undervalued currencies lean against appreciation.”

Monetary Expansion

At the same time, officials from emerging economies including China complained that low interest rates in the U.S. and its developed-world counterparts mean investors are pouring capital into their markets, threatening growth by forcing up currencies and inflating asset bubbles. The MSCI Emerging Markets Index of stocks has soared 13 percent since the start of September.

Polish central bank governor Marek Belka, a former IMF official, said capital inflows have the potential to “derail monetary policy.”

“Brazil won’t pay the price for several countries’ imbalances,” central bank president Henrique Meirelles told reporters. “Our position is: ‘Brazil will protect its economy regardless.’”

Chinese officials repeated they will allow a gradual advance in the yuan and warned that a hasty revaluation would do the world economy more harm than good.

“China’s exchange-rate policy is based on the market supply and demand,” Zhou said. “We do that in a gradual way, rather than a shock therapy.”

Taking Steps

While the yuan last week rose to its highest level since 1993, its gain against the dollar since China pledged in June to make it more flexible is little more than 2 percent.

More and more economies are taking steps to spur growth that end up weakening their currencies. Japan last month sold yen for the first time in six years, and the Federal Reserve may revive large-scale asset purchases next month. While a lower exchange rate can help bolster exports, it also hurts trading partners, who may look to regain advantage through their own devaluations or by erecting trade barriers.

Leaders are seeking to avoid a repeat of the 1930s, when a trade war begun by the U.S. passage of the Smoot-Hawley Tariff Act deepened the worldwide economic slump.

“We’re in a world in which everyone wants a weaker currency but you cannot have an equilibrium of all currencies being weaker,” Nouriel Roubini, the New York University professor who predicted the credit crisis, said.

“Currency-intervention wars eventually can lead to trade wars,” Roubini, chairman of New York-based Roubini Global Economics LLC, told Bloomberg Television.

Capital Controls

Some forms of protectionism may already be on the rise. Ukraine’s Deputy Premier Serhiy Tigipko said in an interview that his country may follow South Korea, Brazil and other emerging markets in seeking to prevent short-term investments from fueling currency volatility. India may also act to “prevent the disruption of the macroeconomic situation,” Reserve Bank of India Governor Duvvuri Subbarao told reporters.

In the U.S., Democratic Senator Jack Reed of Rhode Island told Bloomberg Television’s “Political Capital with Al Hunt” that the U.S. Senate may consider a lame-duck session to deal with legislation aimed at prodding China on the yuan.

Japan also remains ready to act on the yen when needed, Finance Minister Yoshihiko Noda said, although he signaled last week that his nation doesn’t intend to return to the long-term, large yen selling of the past.

IMF Reports

Unable to find common ground themselves, governments agreed the IMF should serve as currency cop by preparing reports to show how the policies of one economy affect others. The studies will focus on the U.S., China, the U.K. and the euro area.

“The need to have this kind of spillover report has been discussed for months and now it’s part of our toolbox,” IMF Managing Director Dominique Strauss-Kahn said.

The IMF nevertheless has little record of success on pushing global authorities to change their ways. A 2006 effort to oversee the rebalancing of the world economy petered out, and China has repeatedly rejected the fund’s analysis.

“The major economies are each encouraging the IMF to push harder on other countries, but showing no willingness to yield to the IMF any such leverage over their own policies,” said Eswar Prasad, a senior fellow at the Brookings Institution and a former IMF official.

Voting Power

The IMF’s membership also split over how to increase the power of emerging markets in its decision-making. The U.S. rejected as insufficient a proposal by European governments to reduce the number of seats they hold on the 24-strong board, according to two European officials.

Attention now turns to the G-20 meetings, starting next week with finance-minister talks and concluding Nov. 11-12 in Seoul with a leaders’ summit. Suggestions for how to resolve currency differences were vague in Washington, with French Finance Minister Christine Lagarde proposing better coordination and more diversification, while Canada’s Jim Flaherty suggested that new “rules of the road” be outlined. European Central Bank Executive Board member Lorenzo Bini Smaghi suggested the G- 20 may be too big to find a compromise.

Unless checked in South Korea, the discord may snap the G- 20’s united front formed to fight the financial crisis and recession.

“A once-promising global response has now been replaced by inadequately coordinated national economic policies and growing frictions among countries,” Mohamed El-Erian, chief executive officer at Pacific Investment Management Co., said in a Washington speech.

To contact the reporter on this story: Simon Kennedy in Washington at Skennedy4@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net

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