Finance ministers struggle to smooth currency tensions (2nd Roundup)

By Chris Cermak Oct 8, 2010, 21:20 GMT

Washington - The world's finance ministers and central bankers appeared to stoke the fires in a growing currency dispute as they gathered for an annual meeting of the International Monetary Fund (IMF) and World Bank on Friday.

Ministers from the Group of 20 (G20), a bloc of top industrial and emerging economies, held a closed-door breakfast on the sidelines of the meeting. The United States, Europe and emerging powers like China faced off over the value of their currencies.

Without mentioning China by name, US Treasury Secretary Timothy Geithner said the global economic recovery was being 'undermined' by emerging powers that would not let their currencies rise and allow a broader rebalancing of the economy to take place.

But China's central bank head Zhou Xiaohuan warned that a 'shock therapy' approach to the Chinese yuan would be dangerous. He promised a gradual rise in the yuan, which the US and Europe consider significantly undervalued.

European officials also voiced concern this week that the euro is too strong against the dollar, while other emerging powers pushed back against the idea that their currencies are undervalued. Japan, which has intervened twice to weaken its currency, vowed to continue dealing with all 'downside economic risks,' including the strong yen.

IMF Managing Director Dominique Strauss-Kahn urged all sides to step back from the talk of a 'currency war' as he opened the annual gathering in Washington. He urged governments to stop using their currencies 'as weapons.'

'History has shown us that's not a solution,' Strauss-Kahn said. 'What we need is more cooperation on the monetary side and on the international system.'

The debate over exchange rates has been fuelled by an increasing unevenness in the global economy as it recovers from last year's recession. Emerging Asian and Latin American powers have pulled out of the crisis with strong growth numbers, while the US, Europe and Japan remain mired in a weak recovery.

Geithner said the global economy's recovery was 'at risk of being undermined by the limited extent of progress toward more domestic demand-led growth in countries running external surpluses, and by the extent of foreign exchange intervention as countries with undervalued currencies lean against appreciation.'

But the Group of 24, a bloc of developing countries, on Thursday blamed record low interest rates in rich nations for provoking a dangerous flood of investment into their economies and forcing up the value of their currencies.

Brazil's central bank head Henrique Meirelles called for a 'multilateral' agreement between countries on exchange rates. But prospects for a deal between finance ministers at this weekend's meeting appeared slim.

French Finance Minister Christine Lagarde said the currency row would not be solved 'overnight.' But she urged for cooler heads to prevail, calling for 'a climate of cooperation and confidence, not a climate of disruption, volatility and war.'

Other European officials have been sounding fears that a strengthening euro, which neared 1.4 dollars this week, will push down their exports at a time when their economies remain fragile.

'More than ever, exchange rates should reflect economic fundamentals,' European Central Bank head Jean-Claude Trichet said Thursday.

Chris Turner of ING Commercial Banking said eurozone officials were beginning to 'see the writing on the wall.' A weak US economy, coupled with emerging markets holding down their currencies is pushing up the value of the euro.

Canadian Finance Minister Jim Flaherty said all sides should resist 'protectionist' measures, but said it was up to countries like China to fulfill past promises to allow their currency to rise.