G-20 Will Pledge to Avoid Competitive Devaluation

Group of 20 finance chiefs will today pledge to avoid competitive devaluations and endorse market-based exchange rates in a fresh effort to defuse mounting trade tensions before they hurt the world economy.

The G-20’s finance ministers and central bankers will probably make the commitments in a statement to be released after talks end today in Gyeongju, South Korea, a G-20 official said, citing a draft and speaking on condition of anonymity.

Policy makers are still wrangling over a U.S. proposal to set targets for current account gaps as a way of rebalancing global growth and realigning exchange rates, leaving further debate to next month’s Seoul summit of leaders. The fragile economic recovery is at stake as nations spur exports with weaker currencies, raising the prospect of protectionism.

The first joint comment on exchange rates by G-20 finance officials since leaders began meeting two years ago still recycles language used at other summits and falls well short of the currency accords of the 1980s. Such calls are unlikely to stop countries such as China from controlling their currencies to offset the sliding dollar, said John Normand, global head of foreign-exchange strategy at JPMorgan Chase & Co.

No ‘Better Option’

“The status quo, whereby countries manage a dollar decline as best fits their circumstances as long as they don’t deliberately strengthen the dollar, will probably persist for lack of a better option,” said London-based Normand in a research report yesterday.

The G-20 officials are meeting amid a so-called currency war as nations from the U.S. to China are accused of using cheaper exchange rates to support economic growth, forcing trade partners such as South Korea and Brazil to temper gains in their own currencies to remain competitive.

In a new bid to dilute the focus on currencies and make a revaluation of the yuan more palatable to China, U.S. Treasury Secretary Timothy F. Geithner proposed countries set numerical goals for their current account surpluses or deficits. While South Korea, France and Canada were among those to back the initiative, it was challenged by major exporters Germany and Japan.

The G-20 members will work to flesh out details of the current account initiative ahead of the Seoul summit, a U.S. official told reporters today. The U.S. does not expect the G-20 to agree on fixed targets and instead may push for ranges or guidelines, with an eye toward a 2015 deadline for sustainable balances, the official said.

IMF Overhaul

The Group of Seven, Brazil, Russia, India and China also agreed a plan to overhaul voting powers at the International Monetary Fund after a disagreement between the U.S. and Europe over how to increase the role of emerging markets, another G-20 official said. Europe will give up two seats on its executive board and a majority of G-20 countries will shift just above 6 percent of the so-called quotas, or voting rights, from over-represented to under-represented countries, officials said.

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 run surpluses larger than 4 percent, while Turkey and South Africa have deficits bigger than that, according to the IMF.

More Flexibility

The G-20 has long sought ways to restrain such imbalances and pivot the world economy away from its reliance on excess U.S. demand and Chinese savings. Limiting those talks to foreign exchange is too inflexible for nations with trade surpluses and refocusing them on current accounts would allow tools other than currencies to be used, a South Korean official said yesterday.

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 Federal Reserve has sent the dollar tumbling by leaning toward the purchase of more assets as officials struggle with unemployment near a 26-year high and inflation they say is below levels consistent with long-term economic growth.

Speculative Cash

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

The G-20 finance ministers previously avoided taking a joint stance on currencies for fear of alienating China. Any pledge against competitive devaluation would nevertheless echo language the G-20 leaders used as recently as an April 2009 conference in London. They also said in Toronto in June that they favored market-based exchange rates.

    Before it's here, it's on the Bloomberg Terminal. LEARN MORE