Battle Lines Drawn Over Currency War

Battle Lines Drawn Over Currency War

By Chris Giles and Alan Beattie, FT | 10 October 2010

Dominique Strauss-Kahn, IMF managing director: "The language is ineffective. The language is not going to change things. Policy has to be adapted"

Global economic co-operation was in disarray and further battles in the currency war looked likely after the weekend's international meetings of finance ministers and central bankers broke up with no resolution. The world's largest economies remained as far apart as ever on currencies. China accused the US of destabilising emerging economies by allowing ultra-loose monetary policy to flood the emerging world with money, while the US insisted the International Monetary Fund should intensify its focus on exchange rates and the reserve accumulation of China.

The lack of any substantive agreements and brinkmanship on proposed reforms to the IMF is likely to exacerbate currency volatility in the month running up to the Seoul Group of 20 summit. Mohamed El-Erian, chief executive of Pimco, the world's largest bond investor, said: "A once promising global response has now been replaced by inadequately co-ordinated national economic policies and growing frictions among countries". The communiqué following the main IMF meeting spoke of countries working "co-operatively" but contained no evidence that leading economies could find agreement on any of the issues that divide them.

Dominique Strauss-Kahn, IMF managing director, called on countries not just to sign up to warm words but to take concrete steps. "The language is ineffective. The language is not going to change things. Policy has to be adapted."

But there was little sign that China would let the renminbi appreciate faster, to the growing frustration of the US. "The IMF must strengthen its surveillance of exchange-rate policies and reserve accumulation practices," said Tim Geithner, US Treasury secretary. This pressure on China is now being met with stiffer resistance.

Zhou Xiaochuan, China's central bank governor, told the IMF meeting the focus on currencies was one-sided. "The continuation of extremely low interest rates and unconventional monetary policies by major reserve currency issuers have created stark challenges for emerging market countries in the conduct of monetary policy". Prof Eswar Prasad of Cornell University said: "China's aggressive pushback against criticism of its currency policy by shifting the line of attack towards loose monetary policies and rising public debt in advanced economies reflects its growing assertiveness and strong resistance to international pressure."

Other finance ministers told the Financial Times of their despair at the intransigence of both sides. Pravin Gordhan, of South Africa, said: "If you listen to the Chinese, they have one interpretation of what is going on. If you listen to the Americans, they have another. There has to be give and take by all."

To try to regain the initiative, the IMF has proposed a new mechanism to enhance its scrutiny of different countries' economic policies by focusing on the ways one economy affects others. But experts do not see this as likely to resolve the deep divisions over policy.