CURRENCIES CENTER STAGE AS G20 GETS UNDERWAY

[Dinerry]

Dated: Friday October 22 2010

The Article :

GYEONGJU, South Korea – Japan warned Friday that the global economy will lose if countries compete to devalue their currencies, as top finance officials from the world’s leading economies gathered for two days of talks they hope will defuse growing tensions over exchange rates.

Economic “fundamentals should be reflected in foreign exchange rates,” Japanese Finance Minister Yoshihiko Noda told reporters. “Excessive volatility in currency markets is harmful to the stability of the global economy and financial system.”

Noda’s comments underscore predictions that currency issues will take center stage at the meeting of finance ministers and central bank governors from the Group of 20 rich and emerging nations, which takes place ahead of a G-20 leaders summit in Seoul next month.

The gathering in the South Korean city of Gyeongju comes just two weeks after the finance mandarins failed at a meeting in Washington to iron out differences that have led to fears of a currency war that could trigger another economic downturn.

In such a scenario, countries devalue their currencies to gain a competitive advantage in a less-than-robust world economy that has yet to fully recover from the global financial meltdown two years ago. Trade barriers are erected in response, hitting international commerce and sending the economic recovery into reverse.

A South Korean government official said the fact finance officials are discussing the currency issue is itself a “good achievement.”

The official, who spoke on condition of anonymity as discussions on the issue were ongoing, said he expects “some progress” at the meeting with language aimed at avoiding a “currency war.”

“I don’t know whether we can make it by the end of this tomorrow or by (the) Seoul summit, but we believe and we hope that countries are willing to cooperate on that point,” the official said.

The Group of Seven industrialized nations, which includes the U.S., Japan, U.K., France, Germany, Italy and Canada, met for informal talks ahead of the full G-20 gathering later Friday. Noda said there was no set agenda for the G7 meeting.

The talks will help set the agenda for a Nov. 11-12 summit of G-20 leaders. U.S. President Barack Obama and the other heads of state will attend the summit.

Separately, Brazil, Russia, India and China — the so-called BRIC countries — were holding a meeting ahead of the G-20 gathering to discuss issues of mutual interest including reform of the International Monetary Fund and increasing trade and investment among themselves, according to D.S. Malik, an official with India’s Ministry of Finance.

China, the world’s No. 2 economy, is under renewed pressure over its management of the yuan, which the U.S., the European Union and Japan say is undervalued, giving its exporters an unfair competitive advantage.

The broad weakening of the dollar and the outlook for possible further monetary easing by the Federal Reserve is another factor adding to the strain. And so-called hot money investment flows into emerging countries in search of higher yields than can be fetched in the developed world have turned up the heat on those currencies, particularly in Asian nations such as South Korea.

Some governments as a result have tried to stem currency appreciation through measures including direct intervention in markets or by imposing controls on capital or taxes on foreign investment.

A senior Treasury Department official told reporters in Washington Wednesday the currency issue would be a major topic at the G20.

“When large economies with undervalued exchange rates act to keep their currencies from appreciating, it compels other countries to do the same,” the official said. “It is bad for the system, bad for all of us.”

The official spoke under ground rules that did not permit identification by name in advance of the G-20 meetings.

One idea mentioned by U.S. officials is to establish numerical targets for current account deficits or surpluses to control trade imbalances.

The Treasury official refused to say whether the U.S. would support inclusion of such a limit, such as 4 percent of a country’s total economy. Noda offered a more definitive opinion, calling the idea “unrealistic.”

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...Link at Currency Newshound / IQD