Group of 20 finance chiefs pledged to avoid weakening their currencies to boost exports and to let markets increasingly set foreign exchange values to defuse trade tensions before they hurt the world economy.
The G-20 agreed to ?move towards more market determined exchange rate systems that reflect underlying economic fundamentals and refrain from competitive devaluation of currencies,? its finance ministers and central bankers said after talks today in Gyeongju, South Korea. U.S. Treasury Secretary Timothy F. Geithner may continue the debate tomorrow when he meets with Chinese Vice-Premier Wang Qishan.
It was the first time the finance officials made a joint stance on exchange rates as they sought to end concern that nations from the U.S. to China are relying on cheap currencies to spur growth, risking a protectionist backlash. The policy makers delayed further debate over a U.S. proposal for current account targets until next month?s Seoul summit of leaders, while agreeing the gaps should be made more sustainable.
?I don?t think the G-20 meeting will completely turn things around in the currency market,? said Thomas Lam, chief economist at OSK-DMG in Singapore. ?There is little evidence to suggest that countries such as China who have been intervening will stop it.?
The G-20 finance officials previously avoided commenting on currencies as a bloc for fear of alienating China. Their statement today still recycles language used at previous G-20 leaders summits in London and Toronto and falls well short of the currency accords of the 1980s.
Dollar?s Decline
The G-20 officials met as China?s restraint of the yuan and the U.S. dollar?s recent slide force trade partners including South Korea and Brazil to temper gains in their own floating currencies to remain competitive. The dollar has dropped as the Federal Reserve mulls easing monetary policy to lift growth.
The dollar this week gained 0.6 percent against a basket of currencies for its first weekly advance since early September, according to IntercontinentalExchange Inc.?s Dollar Index. Yuan forwards dropped most in 22 months yesterday amid speculation the government will rely more heavily on interest-rate hikes to damp inflation after raising its benchmark rate for the first time since 2007.
?Wrong way?
China should open its markets and Federal Reserve Chairman Ben S. Bernanke heard ?criticism? from within the group, German Economy Minister Rainer Bruederle said.
?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.?
European Central Bank President Jean-Claude Trichet said combating deflation ?was also a contribution to global prosperity.?
To dilute the focus of such meetings on currencies and make a revaluation of the yuan more palatable to China, Geithner suggested countries set goals for their current account surpluses or deficits. South Korea and Canada were among those to back the initiative, which was challenged by major exporters Germany and Japan.
The group will ?pursue the full range of policies conducive to reducing excessive imbalances and maintaining current account imbalances at sustainable levels,? the statement said. The International Monetary Fund was told to deepen its monitoring of currencies and persistently large trade gaps.
?Excessive Imbalances?
The G-20 members will now flesh out details by the Seoul forum, a U.S. official said. Although Japanese Finance Minister Yoshihiko 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 with an eye on having sustainable trade positions by 2015.
Achieving healthier expansion means ?we need to work to achieve more balance in the pattern of global growth,? said Geithner. ?This requires a shift in growth strategies by countries that have traditionally run large trade and current account surpluses, away from export dependence and toward stronger domestic demand led growth.?
IMF Overhaul
The G-20 also agreed to what IMF Managing Director Dominique Strauss-Kahn called the ?biggest reform ever? of his institution?s governance. Seeking to increase the role of emerging markets, Europe will surrender two seats on the Washington-based lender?s 24-member executive board and a majority of countries will shift more than 6 percent of so-called quotas to under-represented countries. Quotas determine voting rights, financial commitment and access to aid.
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.
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 after those fault lines helped trigger the credit crisis. Limiting 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, officials said.
Yuan?s Rise
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 the purchase of more assets as it faces unemployment near a 26-year high and weak inflation.
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 this week raised taxes on foreign capital for the second time this month.
?Excess Volatility?
Advanced economies agreed to be ?vigilant against excess volatility and disorderly movements in exchange rates,? the G- 20 statement said. Geithner said the U.S. backs a ?strong dollar? and recognizes its global responsibility to support it.
The agreement will encourage Asian nations to allow their exchange rates to rise without having to worry they will end up doing so alone and lose a trading edge, said Douglas Borthwick, head of foreign-exchange trading at Stamford, Connecticut-based Faros Trading. He said the yuan may climb to 6.60 per dollar in November from 6.66 yesterday and predicted the dollar will drop against the euro, yen and sterling.
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 also up about 3 percent since the end of August.
?China and its neighbors see the need to strengthen their currencies to cool growth and to especially cool inflation,? said Borthwick, whose firm executes currency transactions on behalf of hedge funds and institutional clients. ?Going forward they will all move together and allow their currencies to strengthen, over time resulting in a more balanced economy.?
To contact the reporters on this story: Simon Kennedy in Gyeongju, South Korea at skennedy4@bloomberg.net
To contact the editor responsible for this story: John Fraher at jfraher@bloomberg.net
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