Policy Makers Bemoan Currency Strength as Yellen Defends Fed

Policy makers from around the world bemoaned the economic threat of strong exchange rates as the Federal Reserve played down its influence in currency markets.

As officials landed in Tokyo for annual meetings of the International Monetary Fund, central bankers from Japan and Switzerland yesterday expressed discomfort with the value of their currencies, and the Philippines said Fed decisions are complicating monetary policy. Japanese Prime Minister Yoshihiko Noda echoed the concerns, saying in an interview that his government will act against disorderly gains by the yen.

Such worries across both industrial and developing nations are being heightened by an IMF warning that global growth and trade are slowing, leaving countries at risk of losing an export edge if their exchange rates climb. The Fed again drew fire from emerging markets for propelling their currencies higher, prompting a riposte from Vice Chairman Janet Yellen that was echoed by Israel’s central bank chief Stanley Fischer.

“We are heading into a far more difficult period for the world economy and so there’s an exacerbation of currency wars again,” said Neil Mellor, a foreign-exchange strategist at Bank of New York Mellon Corp. (BK) in London.

Global Slowdown

Policy makers are paying greater attention to the value of their currencies as the IMF predicts worldwide expansion will fade to 3.3 percent this year and estimates international trade expansion will slow to 3.2 percent from 12.6 percent as recently as 2010. The officials spoke ahead of today’s gathering of Group of Seven finance chiefs in Tokyo.

With the yen about 4 percent below the postwar high of 75.35 per dollar reached last October, Noda said in an interview in his office yesterday that the yen is a ‘serious problem,’’ out of step with Japan’s economic performance and “when necessary, we will take decisive action.”

Bank of Japan (8301) Governor Masaaki Shirakawa said at a conference he is “conscious of the effects that the rapid appreciation of the yen could have on Japan’s economy and inflation outlook.”

Thirteen months since the Swiss National Bank imposed a ceiling for its franc of 1.20 versus the euro, Chairman Thomas Jordan told the same event that the cap will remain for the “foreseeable future” and even at that level, the currency posed a “serious” threat to growth.

Currency Tensions

The concerns suggest rich nations are becoming increasingly irritated by exchange rates they see as overvalued, adding a new dimension to the so-called currency wars which were previously fought by emerging markets critical of easy monetary policy in the U.S. and Europe, said Kit Juckes, head of foreign exchange research at Societe Generale SA in London.

“The currency wars are building slowly again and are becoming an issue within the advanced countries too this time,” he said.

Emerging market officials again warned of the risks they face as the Fed embraces easier monetary policy, this time in the form of last month’s decision to embark on open-ended asset purchases. The concern is a third round of quantitative easing will weaken the dollar and propel unwanted capital into their economies.

Fed’s Impact

The Fed “is causing challenges to monetary policy in emerging markets,” Philippine central bank Governor Amando Tetangco said in an interview in Tokyo. “We are watchful of that.”

Indian Finance Minister Palaniappan Chidambaram said Oct. 9 he raised concern the Fed’s actions “may impact commodity prices” with U.S. Treasury Secretary Timothy F. Geithner.

Asked about such worries, Yellen said in Tokyo that if the Fed succeeded in rallying the U.S. economy then the whole world would win. While acknowledging different monetary policies affect capital flows and currency values, she said the Fed is not the main factor and governments have tools of their own to protect their economies.

“It’s not the intention of the U.S. and Fed to make this more difficult,” Yellen said. “On balance, stronger U.S. growth is beneficial for the entire global economy.”

Yellen had some backing from Israel’s Fischer, who said today that the criticism of quantitative easing “is not well founded.”

’Unfounded Criticism’

“The countries that are critical have to explain how they expect the U.S. to return to growth when it has a huge budget deficit to deal with if it’s not allowed to use monetary policy,” he told reporters in Tokyo.

That argument may hold greater weight now and help avoid a full-blown repeat of the so-called currency wars of 2010 when booming developing nations led by Brazil criticized the Fed’s previous bond-buying program for threatening their competitiveness and inflating asset bubbles.

What’s changed is emerging markets are now also slowing, leaving them in need of an uplift from the U.S. The most accurate currency forecasters also expect the dollar to strengthen as U.S. growth outpaces its developed nation counterparts.

“There is also, of course, a beneficial side,” Chidambaram said. “Some of that money may come to India as investments, but we need to balance both the advantages and disadvantages.”

To contact the reporters on this story: Simon Kennedy in Tokyo at skennedy4@bloomberg.net; Toru Fujioka in Tokyo at tfujioka1@bloomberg.net

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net

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