China Rates, Geithner May Signal Accord, BNY Says

U.S. Treasury Secretary Timothy Geithner
Timothy Geithner, U.S. treasury secretary. Photographer: Tony Avelar/Bloomberg

China’s interest-rate increases and U.S. Treasury Secretary Timothy F. Geithner’s commitment to a strong dollar suggest the nations may have reached a currency accord, Bank of New York Mellon Corp. said.

“The timing of this week’s comments and policy shifts at least allows the possibility that some agreement has been reached,” Simon Derrick, chief foreign-exchange strategist in London, said today in an e-mailed note. “If some kind of accord has been reached then this would be hugely significant, signaling trend reversals in a wide range of markets.”

Geithner is traveling this week to Gyeongju, South Korea, to meet with Group of 20 counterparts as tensions heat up over China’s currency. He delayed a report on foreign-exchange markets last week, 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 People’s Bank of China unexpectedly raised its benchmark lending and deposit rates yesterday, the first increase since 2007.

Geithner said two days ago that the U.S. will work hard to “preserve confidence in a strong dollar.” Following the June meeting of Group of 20 leaders in Toronto, members said in a statement they agreed that “monetary policy will continue to be appropriate to achieve price stability,” and endorsed targets to cut deficits.

Yuan Appreciation

“The first part of any accord would certainly require the U.S. not to call China a currency manipulator and to show greater support for its own currency,” Derrick wrote. In return, China might need to “signal that it was prepared to allow the yuan to move at a faster pace,” he said.

One way to do this might be to “show a greater willingness to focus with inflationary pressures and less on attempting to keep the yuan competitive,” Derrick wrote in the note.

China’s yuan has strengthened about 2.5 percent against the dollar since the nation scrapped a two-year currency peg on June 19 after its economy improved. The Dollar Index has tumbled more than 10 percent since June amid mounting speculation that the Federal Reserve may increase asset purchases to stimulate the U.S. economy.

China lifted the benchmark one-year lending rate to 5.56 percent from 5.31 percent. The deposit rate was increased to 2.5 percent from 2.25 percent. The nation’s policy makers are trying to curb lending and prevent an asset-price bubble in a country that surpassed Japan this year as the world’s second largest economy.

Asia Recommendation

“China’s rate hike has increased and not decreased the chance of a G-20 agreement,” BNP Paribas SA analysts led by Hans-Guenter Redeker in London wrote in a note to clients today. “We suggest going long Asian currencies.”

The G-20 meeting of finance ministers this week precedes a meeting of national leaders next month in Seoul.

Currencies and trade flows will be at the center of talks among the finance ministers, a U.S. Treasury Department official told reporters today.

Some big emerging-market nations are resisting market forces and keeping their currencies undervalued, creating a competitive dynamic of resisting market forces, the official said, speaking on condition of anonymity. The U.S. wants foreign exchange rates to reflect market forces and economic fundamentals, the aide said.

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