Global Currency-Trade Battles Stir Fears of New Depression

Thursday, 07 Oct 2010 12:39 PM

 

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World leaders must defuse currency tensions before they worsen to avoid repeating the mistakes of the Great Depression, the head of the World Bank said Thursday.

The spirit of global economic cooperation, first forged in 2008 during the darkest days of the financial crisis, was weakening as the recession gives way to an uneven and shaky recovery, the head of the International Monetary Fund said separately.

Fears of global currency and trade wars, which were key factors in the Great Depression, have jumped to the top of the agenda at IMF and World Bank meetings this weekend, and are also expected to be a primary topic of discussion when Group of Seven finance leaders gather Friday.

These meetings are expected to provide a forum for intense discussions about efforts to persuade China to let its currency rise and tamp down pressures for other emerging countries to control capital flows as the U.S. dollar weakens.

"If one lets this slide into conflict, or forms of protectionism, then we run the risks of repeating the mistakes of the 1930s," World Bank President Robert Zoellick told reporters at a briefing.

The IMF trimmed its 2011 growth forecast for advanced economies Wednesday and warned the task of reducing heavy government debt burdens, while essential, would put a significant drag on those economies.

Slow growth at home leaves countries unusually reliant on exports, and this has heightened concerns they will intentionally weaken their currencies to boost trade.

Zoellick said history shows "beggar thy neighbor" policies don't work, and suggested international agencies such as the IMF and World Trade Organization could help manage currency tensions before they erupt into something more damaging.

Japan intervened to weaken the yen last month for the first time in six years, and several emerging markets have taken steps to prevent their currencies from rising too rapidly.

China at the Center

IMF Managing Director Dominique Strauss-Kahn said fading global cooperation was regrettable.

"I think it's fair to say that momentum is not vanishing but decreasing and that's a real threat," he warned at a separate news conference. "Everybody has to keep in mind this mantra that there is no domestic solution to a global crisis."

Strauss-Kahn said he disliked the notion that a currency war was brewing because the term was "too military" but conceded "it's fair to say that many do consider their currency as a weapon and that's certainly not for the good of the global economy."

In an interview published by Le Monde earlier Thursday, Strauss-Kahn pointed at China's currency policy as a primary sticking point in efforts to rebalance the global economy.

"The undervaluation of the (Chinese) yuan is the source of tensions in the world economy which are in the process of becoming a threat," he told the newspaper. "If we want to avoid creating the conditions for a new crisis, China will need to accelerate the appreciation process."

China held the yuan stable during the financial crisis but in June promised to let it respond more freely to market forces, but since then it has risen only about 2 percent against the U.S. dollar.

Strauss-Kahn said having a bigger say at the IMF, as requested by big emerging economies like China, comes with greater responsibility in the global economy.

"If you want to be at the center of the system ... it goes with having more responsibility in the system," he said.

Central Bankers

Emerging markets say the rich world must do its part too. The European Central Bank and Bank of England both kept interest rates at record lows in meetings Thursday, while the Bank of Japan cut its benchmark rate to zero this week.

The U.S. Federal Reserve is considering printing more money to buy assets in the hope of speeding up the pace of U.S. growth to bring down high unemployment. The side effect is a weaker dollar that is fueling global tensions.

Since mid-June, the U.S. dollar has fallen nearly 13 percent against a basket of major currencies , erasing most of the gains it racked up earlier in the year when European sovereign debt worries sent investors scrambling for safety.

Emerging markets are caught in the crossfire. Investors turned off by low returns in the United States and elsewhere are pouring money into fast-growing economies such as Brazil, driving up asset prices and inflation.

Strauss-Kahn told the news conference that actions to control disruptive currency swings were understandable but over the medium term currencies would have to adjust to permit a necessary rebalancing of the global economy.

© 2014 Thomson/Reuters. All rights reserved.

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