G-20 to Avoid ‘Competitive Devaluation’ of Currencies

G-20 to Avoid ‘Competitive Devaluation,’ Prod China
Finance ministers and central bank governors pose for a group photo at the G20 Finance Ministers and Central Bank Governors' Meeting in Gyeongju, South Korea. Photographer: Tomohiro Ohsumi/Bloomberg

Group of 20 finance chiefs vowed to avoid weakening currencies to lift exports and left it to a leaders’ meeting next month to flesh out how to further pressure member China to allow faster gains in the yuan.

Finance ministers and central bankers ended talks in South Korea Oct. 23 foreswearing “competitive devaluation” to calm fears of a trade war stemming from using cheaper currencies to spur growth. They called for reduced trade imbalances while stopping short of a U.S. proposal for targets that was aimed at making a yuan advance more palatable to China. Leaders will take up the debate at the Seoul summit on Nov. 11-12.

The decisions taken in Gyeongju are unlikely to mark an end to the dollar’s recent slide or trigger a quicker rise in the yuan, according to strategists at banks from UBS AG to Westpac Banking Corp. Investors may now look for direction from the Federal Reserve’s meeting next week to decide whether to buy more assets, a step that may undermine the dollar.

“Tensions may be reduced in the short term, but in the longer term there are still imbalances,” said Mansoor Mohi-uddin, the Singapore-based head of global currency strategy at UBS. The second-biggest currency trader expects the yuan to reach 6.55 per dollar by year-end, an appreciation of less than 2 percent. “The focus will shift to the Fed’s quantitative easing for the dollar. The yuan will continue a modest appreciation.”

Dollar Retreats

The dollar slid today after the meetings omitted any American pledge to refrain from further so-called quantitative easing. Fed Chairman Ben S. Bernanke received “criticism” in Gyeongju after his move toward easier monetary policy pushed the dollar down, German Economy Minister Rainer Bruederle said.

The dollar dropped to a 15-year low against the yen, sinking as low as 80.66 yen. Against the euro, the dollar dropped 0.8 percent to $1.4070 as of 8:08 a.m. in London.

“It’s the wrong way to try to prevent or solve problems by adding more liquidity,” Bruederle said. “Excessive, permanent money creation in my opinion is an indirect manipulation of an exchange rate.”

Canadian Finance Minister Jim Flaherty said at a conference in Seoul today that “I agree that there’s suggestion that aggressive quantitative easing in the United States would create devaluation pressure on the U.S. currency.”

China Drop-by

U.S. Treasury Secretary Timothy F. Geithner, who stopped in Qingdao, China, yesterday for a meeting with Vice Premier Wang Qishan, said in an interview he’s optimistic that China will “continue to move” on the yuan.

The G-20 called the economic recovery “fragile and uneven.” To increase the say of developing nations in the International Monetary Fund’s decisions, the G-20 endorsed what IMF Managing Director Dominique Strauss-Kahn called the “biggest reform ever” of its governance with European authorities agreeing to cut their role.

It was the first time the economic policy makers took a joint stance on exchange rates having previously resisted doing so for fear of alienating China. The G-20 statement still recycles language used at previous leaders’ summits in London and Toronto and falls short of the currency accords of the 1980s.

“I don’t see anything that’s going to discourage people from resuming selling dollars and buying currencies that look to be undervalued,” said Sean Callow, a senior currency strategist at Westpac in Sydney.

Export Concern

The officials met as China’s restraint of the yuan and the U.S. dollar’s recent drop force trading partners including South Korea and Brazil to temper gains in their own floating currencies to remain competitive.

Geithner predicted China will allow the yuan to appreciate more because officials there understand it’s in the long-term interest of domestic growth and global economic stability.

“They recognize it’s important to the world,” he said in an interview on Oct. 23 with Bloomberg Television. As China’s currency stance affects more countries, “China recognizes that, and I think we’re going to see them continue to move.”

David Bloom, global head of currency strategy at HSBC Holdings Plc in London, nevertheless predicted “the ‘currency war’ will persist at least through” to the Seoul meeting. That may spark a dollar rally because ongoing frictions and the threat they prompt greater capital controls and protectionism may deter investors from riskier exchange rates, he said.

Japan’s Stance

Japanese Finance Minister Yoshihiko Noda reiterated that the G-20 meeting didn’t prompt any change in Japan’s currency policy, saying it stands ready to counter a rise in the yen if needed.

To dilute the focus of such gatherings on currencies and help rebalance the world economy away from excess U.S. demand and Chinese savings, Geithner suggested goals for current-account deficits or surpluses. While South Korea and Canada back the strategy, it was challenged by major exporters Germany and Japan.

The group will adopt “the full range of policies conducive to reducing excessive imbalances” and making them sustainable, the statement said. The IMF will deepen its monitoring of currencies and continuously wide trade deficits.

The G-20 members will expand details by the Seoul forum, a U.S. official said. Although Noda said Geithner wanted a 4 percent cap on trade imbalances, the official said the U.S. doesn’t expect a fixed target and may instead push for a range aimed at delivering sustainable trade positions by 2015.

Trade Imbalances

“We’re going to make it easier to sustain support in all countries for more open trade by making sure that we address the risk of persistently large trade imbalances,” Geithner said.

Bundesbank President Axel Weber, who also attended the G-20 talks, said Germany shouldn’t be blamed for having a current-account surplus. Germany is four times more reliant on exports than the U.S.

A current account is the broadest measure of trade because it includes investment and transfer income, and it would be hard to achieve any correction in one without a currency shifting.

Saudi Arabia, Germany, Russia and China all have surpluses larger than 4 percent, while Turkey and South Africa have deficits bigger than that, according to the IMF.

Even as it runs a trade surplus and builds currency reserves, China has curbed the yuan’s rise to about 2 percent since a June pledge to introduce more flexibility, arguing anything other than a gradual appreciation would cause social and economic disruption. At the same time, the Fed has sent the dollar tumbling by leaning toward buying more assets to tackle unemployment near a 26-year high and weak inflation.

Emerging Markets

Caught in the middle, emerging markets are embracing capital controls or intervening themselves to stay competitive with China and slow the inflow of speculative cash. South Korea is discussing several measures including a bank tax or levy on financial transactions, and Brazil last week raised taxes on foreign capital for the second time this month.

To appease critics, advanced economies agreed to be “vigilant against excess volatility and disorderly movements in exchange rates,” the G-20 said. Geithner said the U.S. backs a “strong dollar” and recognizes its global responsibility.

At the IMF, Europe will surrender two seats on the 24- member executive board and more than 6 percent of so-called quotas will pass to under-represented countries. Quotas determine an IMF member’s voting rights, financial commitment and access to loans. As part of this process, G-20 officials also agreed to double the IMF’s permanent resources.

Yuan’s Rise

For all the complaints it faces, China let the yuan gain the most versus the dollar since 2005 in September and by more than 20 percent in the last five years. The Bloomberg-JPMorgan Chase & Co. Asia Currency Index is up about 3 percent since August.

Such advances are likely to continue because “many key interests seem to be aligned,” Thomas Stolper, an economist at Goldman Sachs Group Inc. in London, said in an Oct. 22 report. The U.S. needs a lower currency to help create jobs and the alternative is even more Fed stimulus, which will end up propelling more capital into Asia, he said.

U.S. companies from Costco Wholesale Corp. to Deere & Co. have credited the weaker dollar for boosting earnings. Standard & Poor’s 500 Index firms that get more than half of their revenue internationally have returned about 5.5 percentage points more than those whose sales comes mostly from the U.S. since the start of September, according to data compiled by Bloomberg.

“Once the fact has been accepted that the dollar has to weaken because there are no real alternatives it is all about managing the process on a global scale,” Stolper said.

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