G-20 Urges Flexible Currencies, Warns About Volatility

Group of 20 finance chiefs pledged to move toward more flexible currency regimes while highlighting policy makers’ commitment to avoid competitive devaluations as global growth sours.

“We reiterate our commitments to move more rapidly toward more market-determined exchange rate systems and exchange rate flexibility to reflect underlying fundamentals,” finance ministers and central bankers of G-20 nations said in a statement yesterday after a two-day meeting in Mexico City.

Lackluster growth from the U.S. to Japan to Europe has prompted those nations’ central banks to increase monetary stimulus, raising concerns that such moves may end up hurting emerging economies by bolstering those currencies. At the same time, advanced nations have urged countries including China to allow the markets to set their exchange rates.

While Brazilian Finance Minister Guido Mantega has accused the U.S. and Europe of stoking a global “currency war,” policy makers of some smaller economies have defended the central banks’ stimulus. Australian Treasurer Wayne Swan yesterday endorsed the efforts of the Federal Reserve, the Bank of Japan and the European Central Bank for their respective economies, arguing that stronger growth in the developed world will ultimately benefit the everyone.

The G-20 refrained from singling out China’s currency in yesterday’s statement after the yuan strengthened 0.7 percent versus the dollar over the past month, the third-best performance among 25 most-actively traded emerging-market currencies. The yuan rate is close to its equilibrium level, He Jianxiong, director-general of the People’s Bank of China’s international department, said after the meeting in Mexico City, echoing deputy governor Yi Gang’s comment last month at an International Monetary Fund event in Tokyo.

Market Rates

The statement also acknowledged the harm that may come when exchange rates are solely market-determined, keeping some room for governments to intervene at times of emergency. Japanese Finance Minister Koriki Jojima yesterday said he told his counterparts of the threat that the strengthening yen poses to the nation’s fragile recovery.

“Excess volatility of financial flows and disorderly movements in exchange rates have adverse implications for economic and financial stability,” the G-20 nations said.

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