Group of 20 policy makers will try to resolve differences over exchange-rate policies this weekend as U.S. officials continue to press China to let the yuan appreciate faster.
The U.S. is pushing for the G-20 to agree on a statement of cooperation on exchange-rate issues, either during the Oct. 22- 23 gathering in Gyeongju, South Korea, or at a summit of leaders in Seoul in November, a U.S. official said today. The U.S. has said it wants currencies to respond to market forces and economic fundamentals, rather than government intervention.
China needs to let the yuan rise so other emerging market nations will feel comfortable letting market forces affect their currencies, Treasury Secretary Timothy F. Geithner said in a Wall Street Journal interview published today, repeating a theme from speeches he gave Oct. 6 in Washington and Oct. 18 in Palo Alto, California. Geithner also said that “major currencies” are “roughly in alignment now.”
Geithner’s comments show the U.S. is trying to forge a united front among the Group of Seven nations in urging China and other emerging market nations to let their currencies rise, said Marc Chandler, global head of currency strategy at Brown Brothers Harriman.
“How the dollar does against the euro and sterling might be different than how the dollar does against Asia,” Chandler said. He predicted there would be increasing pressure on China at the G-20 meetings, without an international agreement on intervention such as the Plaza Accord of 1985.
Geithner’s comments led to gains in the dollar, sending it to 81.27 yen as of 11:32 a.m. in Tokyo from 81.09 yesterday in New York. The dollar gained to $1.3913 per euro from $1.3964.
G-20 officials convene amid concern countries are pursuing weaker exchange rates as a route to stronger economic growth, either by limiting currency gains with government purchases like China or by discussing possible monetary easing, as the U.S. and U.K. have done.
Stuck in the middle are nations such as South Korea and Brazil, which have introduced controls to slow currency gains and capital inflows. China’s surprise shift to higher interest rates this week underscores the task developing nations face as they struggle to keep speculative cash from destabilizing their economies.
Emerging-market equity mutual funds attracted more than $60 billion this year and bond funds lured $41 billion, both on pace for record annual inflows, according to data compiled by EPFR Global, a Cambridge, Massachusetts-based research firm. The investment drove 19 of 25 emerging-market currencies tracked by Bloomberg higher versus the dollar.
While Brazil has been more willing to relax its exchange- rate controls, it is now finding that approach difficult to sustain because of actions by other large emerging-market nations, a U.S. Treasury official told reporters yesterday, without naming China specifically. Brazil and India are framing the issues the G-20 will need to tackle, the official said.
Group of 20 finance chiefs will pledge to “refrain from competitive undervaluation” of their currencies, Dow Jones Newswires reported, citing a draft of a statement for release after the Gyeongju meeting. The G-20 will also promise to move toward a “more market-determined exchange rate system,” and seek to minimize “adverse effects of excess volatility and disorderly movements in exchange rates,” according to Dow Jones.
The U.S. backs current-account targets to gauge whether individual trade surpluses or deficits are sustainable, and Geithner wants the International Monetary Fund to take on a larger role of economic surveillance, U.S. officials said. The G-20 must help the IMF fulfill its roles in overseeing global monetary systems and giving countries frank evaluations of their exchange-rate policies, the Treasury official said.
Bank of England Governor Mervyn King said finance chiefs need to reach a “bargain” to coordinate economic policies, though real agreement would require a “revolution.”
“What is needed now is a grand bargain among the major players in the world economy,” King said in an Oct. 19 speech to business leaders in Dudley, England. “A bargain that recognizes the benefits of compromise on the real path of economic adjustment in order to avoid the damaging consequences of a move towards protectionism.”
‘Weapon of Choice’
“The weapon of choice today is a competitive devaluation,” Nobel Prize-winning economist Joseph Stiglitz said yesterday in an interview on Bloomberg Radio’s “The Hays Advantage” with Kathleen Hays. “Of course, not everybody can weaken their currency relative to others.”
Geithner last week delayed a report on foreign-exchange markets, saying the yuan remained undervalued and that China needed to show continued commitment to allowing the currency to rise against the dollar over time. The yuan has risen 2.7 percent since a two-year peg against the dollar was scrapped on June 19.
China Central Bank Governor Zhou Xiaochuan earlier this month said his nation needs to avoid the “shock therapy” of excessive yuan appreciation and “very fast” gains probably wouldn’t end global economic imbalances. Premier Wen Jiabao also warned of the dangers of a rapid rise, saying yuan gains of 20 percent to 40 percent would exacerbate Chinese unemployment and cause social upheaval.