Currency war fears tinge IMF meetings

WASHINGTON Mon Oct 4, 2010 10:04am IST

An employee of a money changer counts U.S. dollar notes from a customer in exchange for rupiah notes in Jakarta November 19, 2008. REUTERS/Beawiharta/Files

An employee of a money changer counts U.S. dollar notes from a customer in exchange for rupiah notes in Jakarta November 19, 2008.

Credit: Reuters/Beawiharta/Files

Related Topics

WASHINGTON (Reuters) - If there's one thing the world's economic powers can agree on, it's that none of them wants a strong currency right now.

Most advanced economies expect lukewarm domestic growth at least through next year, leaving them unusually export-dependent. The major emerging economies, including China and Brazil, rely on exports too. They all know a weaker currency gives their goods a competitive advantage.

Fears that a currency war may be brewing will likely dominate talks when financial leaders gather at the twice-yearly International Monetary Fund and World Bank meetings in Washington beginning on Friday.

In the past month, Japan has intervened to drive down the value of the yen, and a couple of emerging markets have followed. The U.S. dollar has tumbled as investors brace for the Federal Reserve to print as much as $1 trillion to fund debt purchases in the hope of propping up the recovery.

Brazilian Finance Minister Guido Mantega said last Monday the world was in an "international currency war" that put emerging markets like Brazil at a disadvantage. Both the head of the IMF, Dominique Strauss-Kahn, and U.S. Treasury Secretary Timothy Geithner dismissed that view, however.

U.S. employment figures due on Friday are likely to serve as yet another reminder of the sluggish pace of recovery. Economists polled by Reuters think the data will show virtually no job growth in September, with the unemployment rate ticking up to 9.7 percent.

That is likely to provide encouragement for the Fed to flood the economy with even more easy money, perhaps as early as its November policy-setting meeting, which would put still more downward pressure on the dollar.

Nobel-prize winning economist Joseph Stiglitz said weakening the dollar may be the Fed's most powerful economic weapon because interest rates are already rock bottom, and this has not spurred sufficient lending or spending.

"One of the main ways that our monetary policy is working is through competitive devaluation," he said in a Reuters Insider interview. "Brazil, China, India are probably robust enough that they can withstand that, but I certainly understand their annoyance."

The Bank of Japan is also considering pumping more money into its economy to keep a lid on the yen, and could announce another government bond purchase program at its policy meeting this week.

MUSICAL CHAIRS

In addition to the currency debate, the IMF faces its own internal battle. Fast-growing China and other big emerging markets want greater representation in the financing institution, which means some of the developed countries will have to yield some of their power.

European countries currently control one-third of the 24 seats on the IMF's executive board, and the United States wants them to give up some of those spots. European countries have proposed giving up two seats to emerging economies on a rotating basis as part of a power-sharing scheme.

Simply rotating seats may not be enough of a change to satisfy Washington and other critics who feel the arrangement is unfair. Development groups said the Europeans' proposal was little more than a symbolic gesture to poorer countries that deserve representation commensurate with their growing power.

Germany, France and Britain now have their own seats on the board, while smaller European nations Belgium, the Netherlands, Spain, Italy and Denmark represent groups of countries.

Treasury's Geithner has complained that this setup gives Europe far greater decision-making power than the United States even though the two have similar-sized economies.

Ultimately, some sort of compromise will have to be reached -- the IMF needs to resolve this issue by October, when the board's mandate expires -- but the Europeans' "non-proposal" does not amount to substantial change, said Domenico Lombardi, a senior fellow at the Brookings Institution think tank and a former IMF board member.

"I don't think it is going to fly at all with the U.S. and the rest of the membership," Lombardi said.

(Editing by Padraic Cassidy)

FILED UNDER:
Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.

  • Most Popular
  • Most Shared

REUTERS SHOWCASE

Coal Block Allocation

Coal Block Allocation

Government urges Supreme Court to not cancel some 'illegal' coal mines  Full Article 

Modi in Japan

Modi in Japan

Japan and India agree to boost strategic ties at summit  Full Article 

Basel III Norms

Basel III Norms

RBI amends Basel III guidelines for banks  Full Article 

HSBC PMI

HSBC PMI

Factory activity expands at slower clip in August.  Full Article 

Current Account

Current Account

Balance of payments surplus for third straight quarter  Full Article 

India Infrastructure

India Infrastructure

RBI rule handicaps India's infrastructure hopes  Full Article 

Book Talk

Book Talk

Reema Abbasi and a glimpse of Pakistan’s Hindu past  Full Article 

China Economy

China Economy

Retreat in China's PMIs heightens calls for policy easing.  Full Article 

Managing Share Sales

Managing Share Sales

Govt seeks bids from banks to manage PFC, REC share sales   Full Article 

Reuters India Mobile

Reuters India Mobile

Get the latest news on the go. Visit Reuters India on your mobile device.  Full Coverage