The United States today urged G20 powers to alter their currency regimes at the start of a global summit, but faced resistance to its ideas to reorder the post-crisis world economy.
Currency war fears stalk G20 summit
The United States urged G20 powers to alter their currency regimes to shore up fragile global growth, but faced resistance today to its ideas to reorder the post-crisis world economy.
G20 finance ministers and central bankers opened a two-day meeting in South Korea, stalked by warnings of an all-out currency war between debtor nations such as the United States and export powerhouses such as China.
Ministers from the G7 grouping of North America, wstern Europe and Japan met for an hour ahead of the G20 talks, facing warnings that failure to rectify skewed patterns of economic growth could ignite trade protectionism.
The rhetoric has become heated as the G20 prepares for a Seoul summit next month of leaders at the heart of the forex row, including the US and Chinese presidents.
In a letter to his G20 colleagues, US Treasury Secretary Timothy Geithner urged nations running big trade surpluses to reform their exchange-rate policies. He did not name the nations, but China seemed the clear target.
He wrote that countries should aim to reduce their surpluses or deficits to a yet-to-be determined share of gross domestic product in the coming years.
G20 nations with large deficits should boost national savings via "credible medium-term fiscal targets" and boost their exports, he said in the letter.
"Conversely, G20 countries with persistent surpluses should undertake structural, fiscal and exchange-rate policies to boost domestic sources of growth and support global demand," Mr Geithner wrote.
With a super-loose US monetary policy weakening the dollar, major G20 economies such as Japan, South Korea, Brazil and Indonesia have intervened in recent weeks to curb an alarming rise in their currencies.
But for the United States, which is in the throes of election season, China lies at the root of the problem owing to its firm control over the yuan's value as a means of safeguarding its humming export machine.
Mr Geithner said "G20 countries should commit to refrain from exchange-rate policies designed to achieve competitive advantage by either weakening their currency or preventing appreciation of an undervalued currency".
Apparently signalling they want a temporary truce, the G20 ministers will pledge to "refrain from competitive undervaluation" of their currencies, according to a draft statement.
They will "move towards [a] more market-determined exchange rate system", the draft said, without spelling out how.
Mr Geithner wants export giants such as China to limit their overall current-account surpluses, as a backdoor way of making them appreciate their currencies.
China this week surprised markets by raising interest rates to rein in accelerating inflation. But it has shown no appetite for coordinated action to unshackle the yuan, for fear of driving exporting companies out of business.
And Japan's finance minister Yoshihiko Noda said Mr Geithner's plan to target the current account was "not realistic". Germany and Russia have also reportedly expressed doubts about the plan.
But despite Mr Noda's scepticism, a French official said Mr Geithner's letter was "well received" by the rest of the G7 and that it reflected a "convergence of views".