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Strauss-Kahn Sees IMF Role in Avoiding Currency ‘War’

Strauss-Kahn Sees IMF Role in Avoiding Currency ‘War’

International Monetary Fund Managing Director Dominique Strauss-Kahn said the fund will try to help resolve trade imbalances that may otherwise lead to conflicts over currency valuations.

Using currencies as weapons “is not a solution” and “it can even lead to a very bad situation,” Strauss-Kahn said in a speech in Washington today. “There’s no domestic solution to a global problem.”

The IMF’s annual meeting began today amid concern a “currency war,” a term first used by Brazilian Finance Minister Guido Mantega last week, is being fought by nations keen to embrace weaker exchange rates as a route to stronger economic growth. The dollar dropped below 82 yen for the first time since 1995 today and was headed for a fourth weekly decline against the euro amid speculation the Federal Reserve will soon deliver more economic stimulus.

While the currency issue threatened to dominate discussions among IMF leaders, Chinese leaders said they would stick to a gradual rise in the yuan’s value to avoid social turmoil.

“China’s exchange-rate policy is based on the market supply and demand relation to move gradually to the equilibrium point,” China’s central bank Governor Zhou Xiaochuan told a panel discussion today. “We do that in a gradual way, rather than a shock therapy.”

U.S. Unemployment

Zhou also said exchange rates won’t solve U.S. unemployment, rejecting a widely held view in the U.S. Congress.

Strauss-Kahn, at a news conference yesterday, said the IMF is the “right place” to make progress on increasingly tense currency issues while also agreeing that the yuan itself is undervalued.

The IMF is working on new “spillover reports” to show the linkages between economies, Strauss-Kahn said. Such a report can help “understand the two sides” he said at the panel discussion hosted by the British Broadcasting Corp. in Washington.

The IMF reports will focus on the U.S., China, the U.K., Japan and the euro area, Strauss-Kahn said in May.

They will show, for instance, how the U.S. monetary policy affects capital flows to other countries, he added today.

Crafted Proposals

The Washington-based institution has also crafted proposals to Group of 20 leaders that can help lift global growth by 2.5 percentage points within five years, he said.

Many advanced nations such as the U.S. have yet to adopt policies that will reduce their reliance on government spending and strengthen household demand and exports, the IMF said in its World Economic Outlook report this week. At the same time, developing nations such as China are keeping their currencies weak and remain overly dependent on overseas sales to spur growth.

Strauss-Kahn yesterday called for a “systemic stability initiative” to improve the situation of imbalances, without giving further details. He also dismissed chances of a return to the currency accords of the 1980s.

“It makes sense” for the IMF to be a forum for currencies and the fund’s staff is working on the idea, IMF chief economist Olivier Blanchard told reporters today.